SUBMITTED TO

Nishant Navneet Soren

Asst. Prof. Menon Roy

8th Sem A

Direct Tax Law

Roll-176

Place of Effective Management in India Taxation: Analysis and Safeguards

The India Budget, 2015 has proposed the amendment of Section 6 of the Income
Tax Act which alters the conditions under which a company is resident in India by
including the concept of place of effective management or POEM. Instead
of the clause during that year, the control and management of its affairs is
situated wholly in India, the new clause will read its place of effective
management, at any time in that year, is in India.
Even if for a short time the effective control is in India, that would make the
company tax resident.
In the memorandum to finance bill 2015, the honble finance minister has given
the following explanation for introduction of POEM:
The modification in the condition of residence in respect of company by
including the concept of effective management would align the provisions of the
Act with the Double Taxation Avoidance Agreements (DTAAs) entered into by
India with other countries and would also be in line with international standards.
It would also be a measure to deal with cases of creation of shell companies
outside India but being controlled and managed from India.
After the amendment, India has become the unique country in the world (other
than Malaysia) which:
Taxes the Global Income of Its Residents
Company is treated as tax resident if it has Place of Effective management in
India
Place of Effective Management, at Any TIME of the year situated in India will
make company tax resident in India.
1. Concept of POEM in other Countries- Corporate tax residency
Let us see how the tax residency is determined in respect of companies in other
countries:
China: A company is considered to be resident in the Peoples Republic of China
(PRC) if it is established under PRC law, or is an enterprise that is established
under the laws of foreign countries (regions), but its place of effective
management is located in PRC. Tax residents are taxed on their global income.

Note: It does not make foreign enterprise, tax resident using the concept of at
any time in the year
France: France has a territorial system of corporate income taxation.
Accordingly, French companies and French branches of foreign companies are
subject to corporate income tax for profits derived from businesses run in France,
i.e. companies, wherever resident, are only subject to corporate income tax on
income derived from French source.
Note: Neither there is concept of POEM nor concept of global taxation of
residents.
Brazil: A foreign company is resident if incorporated in Brazil. Taxable on global
income
Note: No concept of POEM in Brazil
Australia: A company is a resident of Australia if a) it is incorporated in
Australia; or b) although not incorporated in Australia it carries on business in
Australia and has either i) its central management and control in Australia ii) its
voting power controlled by shareholders who are residents of Australia.
Note: No Concept of POEM at any time in the year in Australia as well.
UK: companies are UK tax resident if they are incorporated or centrally managed
and controlled in the UK.
Note: UK also does not have concept of POEM
Germany: Corporations with a registered office or a German place of
management and control are deemed to be resident in Germany. Foreign
companies that have neither their legal seat nor a place of management and
control in Germany are deemed to be non-resident.
Note: Germany also does not have concept of POEM.
Italy: Resident companies are those that, for the greater part of the tax year,
have had their legal headquarters, place of effective management or main
business purpose in Italy. The place of incorporation is not relevant. Resident
companies are subject to taxation on their worldwide income
Note: It is different from Indian rule in that it requires place of effective
management should be greater part of the tax year whereas india
requires POEM at any time of the tax year.
South Africa: A company is regarded as a South African resident if it is
incorporated in South Africa or if it has its place of effective management in
South Africa. Resident companies are subject to tax on their worldwide income.
Note: It is different from Indian rule as it does not make a company tax resident
if place of effective management is situated in SA even for one time during
the year.

Malaysia: A company carrying on a trade or business is resident in Malaysia for

the basis year for a year of assessment if at any time during the basis year the
management and control of its business or of any one of its businesses are
exercised in Malaysia.
Note: It comes close to India (now amended) definition for determining tax
residency of companies.
Singapore: A company, whether incorporated in Singapore or otherwise, is
considered a resident of Singapore for tax purposes if the place of control and
management of its business is exercised in Singapore. Generally, a company is
treated as a resident of Singapore if, among other things, its directors meetings
are held in Singapore.
Note: similar to Germany but No concept of POEM at any time.
Russia: Russia has recently introduced in Nov 2014, the concept of Place of
Effective management for determining tax residency of companies, however it
also does not have concept of POEM at any time.
An analysis of above shows that only Malaysia has the concept of
corporate tax residency similar to new India Position effective from
1.4.2015.
2. Concept of Corporate tax residency in DTAAs
Though, most of the DTAAs have concept of Place of effective
management for determining residential status of companies, however, none of
the DTAAs nor the OECD model conventions have the concept of Place of
effective management at any time in the year.
Nowhere, it is found that a corporate is made a tax resident if, it has place of
effective management AT ANY TIME IN THE YEAR
Concept of Place of Effective management is commonly used in Article 4Resident as a tie breaker rule wherein if the company is resident of both
contracting states then it shall be considered as resident where place of
effective management is situated.
Also, concept of POEM is also commonly used in article 8 pertaining to Shipping
and airline business.
However, the India DTAA with the following countries still does not have concept
of POEM: Canada, China, Greece, Libya, Thailand, Turkey, USA.
DTAA with Greece is unique in the sense that it clearly defines the tax residency
of companies for the purpose of DTAA and does not leave the issue of
determination of tax residency to be determined on the domestic laws of the
country.

It does not mention the concept of POEM , it specifically mentions that a

company resident in India if it is incorporated in India or its business is wholly
managed and controlled in India.
So, the present change in definition will not impact companies operating with
Greece.
3. OECD commentary on Article 4- 2014 Determination of Residence
OECD commentary on Article 4 of model convention on Residence mentions as
under:
The place of effective management is the place where key management and
commercial decisions that are necessary for the conduct of the entitys business
as a whole are in substance made. All relevant facts and circumstances must be
examined to determine the place of effective management. An entity may
have more than one place of management, but it can have only one place of
effective management at any one time.
Some countries, however, consider that cases of dual residence of persons who
are not individuals are relatively rare and should be dealt with on a case-by-case
basis. Some countries also consider that such a case-by-case approach is the
best way to deal with the difficulties in determining the place of effective
management of a legal person that may arise from the use of new
communication technologies.
Competent authorities having to apply such a provision to determine the
residence of a legal person for purposes of the Convention would be expected to
take account of various factors, such as where the meetings of its board of
directors or equivalent body are usually held, where the chief executive officer
and other senior executives usually carry on their activities, where the senior
day-to-day management of the person is carried on, where the persons
headquarters are located, which countrys laws govern the legal status of the
person, where its accounting records are kept, whether determining that the
legal person is a resident of one of the Contracting States but not of the other for
the purpose of the Convention would carry the risk of an improper use of the
provisions of the Convention etc.
Countries that consider that the competent authorities should not be given the
discretion to solve such cases of dual residence without an indication of the
factors to be used for that purpose may want to supplement the provision to
refer to these or other factors that they consider relevant.
Reservations on the Article
Japanand Korea reserve their position on the provisions in this and other Articles
in the Model Tax Convention which refer directly or indirectly to the place of
effective management. Instead of the term place of effective
management, these countries wish to use in their conventions the term head
or main office.

Turkeyreserves the right to use the registered office criterion (legal head office)
as well as the place of effective management criterion for determining the
residence of a person, other than an individual, which is a resident of both
Contracting States because of the provisions of paragraph 1 of the Article.
TheUnited States reserves the right to use a place of incorporation test for
determining the residence of a corporation, and, failing that, to deny dual
resident companies certain benefits under the Convention.
Israelreserves the right to include a separate provision regarding a trust that is a
resident of both Contracting States.
Estoniareserves the right to include the place of incorporation or similar criterion
in paragraph 1.
4. Adverse Consequences of POEM
The government believes the current conditions are practically inapplicable and
contends they can be easily subverted by simply holding a board meeting
outside India, leading to the creation of shell companies, which are incorporated
outside but controlled from India. However, the change also will involve practical
difficulties as under:
4.1 Consequences for Indian MNCs.
Many executives are associated with the Indian parent company function as
directors of its foreign subsidiaries. Now the power will have to be entirely
delegated to an independent board abroad, only associated with the foreign
entity. This may increase compliance cost for Indian companies
If an Indian company has a subsidiary in another country where it has certain
operations and pays taxes to the local authority there, it will have to pay tax
back home in India if key decisions with respect to the foreign business are
determined to have been taken in India, or if key management personnel like a
director on the board of the overseas firm resides in India.
Many overseas subsidiaries are created for the purpose of facilitating business
activities like fund-raising and did not have any operations of their own, and
these may be especially impacted as a consequence of the proposed
amendment law.
4.2 Consequences for Foreign MNCs
Foreign companies with legitimate business operations outside India would end
up being treated as Indian tax residents and consequently, be subjected to tax in
India on their global income. This could occur if, for example, a board member of
the foreign company is present in India and participates in the decision-making
process from India only in that single board meeting. This anomalous situation
will result in double taxation of income which may not be mitigated by tax
treaties as both countries (viz. India and the country of incorporation) will seek to
tax the global income of the foreign company.

4.3 Other Areas of litigation in determining POEM in India

Mobile places of effective management It is not too difficult, for example,
to envisage a situation where the managing director of a company who is
responsible for the management of that company is constantly on the move. In
some extreme cases, that person may consistently be making the decisions
while flying over the ocean or while visiting various sites in different jurisdictions
where his business is conducted.
Similarly, a board of directors may arrange to meet in different places throughout
the year. For example, the board of a multinational enterprise may agree to meet
at the offices of the enterprise around the globe on a rotational basis. This can
also lead to an enterprise having a mobile place of effective management.
Place of effective management in multi-jurisdictions: The characteristics
of effective management may exist in a number of jurisdictions and it may be
said to exist simultaneously in more than one jurisdiction without a specific
single jurisdiction being dominant. Thus to the extent that the place of
effective management test fails to provide a clear allocation of residence to
one country, albeit in a limited number of cases, it may be seen to be an
ineffective rule.
Videoconferencing: If senior managers adopt conferencing through the
Internet, for example, as a key medium for making management and commercial
decisions and those managers are located throughout the world, it may be
difficult to determine a place of effective management. In such cases, a place
of management might be regarded as existing in each jurisdiction where a
manager is located at the time of making decisions, but it may be difficult (if not
impossible) to point to any particular location as being the one place of
effective management.
5. POEM: Safeguards to be adopted
Given the new definition of corporate tax residence in India , it is important for
foreign companies, particularly for overseas joint ventures, or subsidiaries of
Indian entities to review the corporate decision making process. Further it is also
relevant to appropriately document the process and demonstrate adherence
thereto in substance at the ground level to mitigate any potential tax risks
arising in the tax proceedings.
Highlighted below are some of the illustrative practical suggestions that might
help in substantiating the POEM of a foreign subsidiary or joint venture in foreign
jurisdiction:
5.1 Independent Board of Directors(BOD) of the foreign entity
The BOD of the foreign entity should be an Independent and autonomous body.

The decisions of the BOD should be well informed and duly deliberated upon. The
deliberations undertaken by the BOD should be documented and recorded
appropriately in the minutes of the meeting.
5.2 Place of BOD and Nature of Decisions:
The BOD meetings of the foreign entity should be held only in the foreign
country.
Strategic and major commercial decisions should be taken in such meetings held
outside India.
All the directors should attend these meetings outside India.
No BOD meetings should be held in India and no strategic decisions should be
taken from India.
In case the BOD meeting is conducted through video or teleconferencing, the
host countrys corporate law is relevant for determining place of meeting in such
cases.
5.3 Clarity on Key roles and activities
There should be absolute clarity on the key business role and activities of the
foreign subsidiaries or JVs in foreign jurisdiction as evidenced in its Charter
documents
Charter documents of the foreign subsidiary should adequately provide all
powers to run the business activities on its own.
Foreign corporate law compliances to be undertaken- minutes, quorum, registers,
secretarial records, etc. should be maintained in the registered office of the
foreign country.
5.4 Extent of parent company support and stewardship function
Ensure that the parent companys influence on subsidiary is restricted to only to
give visionary direction to its business and shall, at no time, extend to the actual
steering of the subsidiarys key activities.
Regarding the Indian Parent companys involvement in the foreign subsidiary, it
must be noted that exercise of powers by the parent company must be in the
capacity of majority shareholder to protect its interest and not to take control of
subsidiary and run it.
The role of parents nominee (preferably non-resident Indian and not having any
exceptional powers to run the subsidiary) acting on behalf of the parent company
can only be limited to giving strategic direction and co-ordination to protect the
shareholders interests.

The general meeting of the shareholders, where the parent company, being the
majority shareholder, can decide on matters like declaration of dividend, sale of
undertakings etc. should preferably be held in the country of incorporation.
The parent company shall not act in a steering role to carry out day to day
management of the subsidiary.
The decision of the appointment of directors of the foreign subsidiary should not
be taken in India; however a recommendation may be made by the
representative directors of the parent company in India.
Any recommendations made by the parent company should be actively and
independently discussed and decided by the subsidiary company.
5.5 Functioning of Executive Directors and officers
Executive directors, CEOs, COOs, CFOs and other key management personnel of
the foreign subsidiary should be based outside India.
The foreign company should make proper orientation and create awareness
amongst the executive directors, officers and board members about the issues
related to POEM by conducting regular sessions for them highlighting key dos
and donts while with regard to conducting business, their international mobility,
meetings, video conferencing, work permit documents, communicating through
emails etc.
Various working documents in relation to these executive directors and officers
like appointment letters, titles of designations offered, work visas, business
cards, service records, domicile proofs, and social security compliances should
be critically examined from the POEM perspective and should be regularly
reviewed.
The information posted on the websites of the foreign subsidiary or the Indian
parent company about the foreign companys operations as well as about the
key functions and role of the executive directors and officers of the foreign
company should be regularly reviewed.
The powers of the respective executive directors and officers about taking any
strategic or commercial decisions should be documented adequately and such
decisions should be subjected to BOD approval which should be in foreign
jurisdiction.
Communication flow regarding management decisions and functions should be
appropriately documented.
- See more at: http://taxguru.in/income-tax/place-effective-management-indiacorporate-taxation-analysis-safeguards.html#sthash.202z4Eck.dpuf