The last blog discussed the determination of residential status of a corporate entity in India. A corporate entity is considered an Indian tax resident if either:
- it was formed and registered under the Companies Act, 2013; or
- its place of effective management (POEM) is in India at any time during the financial year.
The concept of POEM states that an entity has POEM in India where its key management and commercial decisions that are necessary for the conduct of its business as a whole are, in substance made in India. The key principles outlining this concept are:
- POEM is presumed to be outside India where a corporation is engaged in active business outside India and majority of its board meetings are held outside India. However, where an Indian holding corporation or a person resident in India is makingthe decision instead of the directors or management, then POEM is likely to be in India. In determining the active business outside India, the corporation needs to analyze assets, employees and other aspects for consecutive three years including the current financial year.
- POEM is analyzed for corporations other than covered above on the basis of two prong test, i.e., identification of the persons who actually make the key management and commercial decision for the corporation’s business as a whole and the place where such decisions are made. This determination is not on isolated facts and illustrated with examples in the documents issued by the CBDT.
The POEM analysis is therefore factual and depends on the facts and circumstances of each case. The corporation therefore should have clarity in its active business operations carried out inside or outside India for application of POEM. This annual determination of a corporate entity having a POEM in India, however, does not apply to corporations having turnover less than INR500 million (approx. USD 7 million) in a tax year.
Our whitepaper titled Interaction of Indian and U.S. Tax Laws brings out the differential tax rates for resident and foreign corporations in India. An Indian domestic corporation is an Indian tax resident entity and taxed depending on its turnover from base rates of 25% or 30%. But a foreign corporate entity with POEM in India is taxed at base rate of 40%.