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Place of Effective Management (POEM) in India Corporate Taxation Analysis & Safeguards

Income Tax - Direct Tax Code - DTC - By: - CA Rohit Gupta - Dated:- 7-3-2015 Last Replied Date:- 9-3-2015 - Place of Effective Management (POEM) in India Corporate 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 affair .....

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rovisions 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 Pla .....

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ries (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 subjec .....

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tralia 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 plac .....

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t 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. Mal .....

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rol 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 ha .....

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AT ANY TIME IN THE YEAR Concept of Place of Effective management is commonly used in Article 4-Resident 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, T .....

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companies operating with Greece. 3. OECD commentary on Article 4- 2014 - Determination of Residence 3.1 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 entity's 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 m .....

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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 person's headquarters are locat .....

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be used for that purpose may want to supplement the provision to refer to these or other factors that they consider relevant. 3.1 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 righ .....

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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 .....

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n 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 cons .....

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ation 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 .....

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e 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 .....

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ment. 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 t .....

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nd 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 country s corporate law is relevant for determining plac .....

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egistered office of the foreign country. 5.4 Extent of parent company support and stewardship function Ensure that the parent company s 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 subsidiary s key activities. Regarding the Indian Parent company s involvement in the foreign subsidiary, it must be noted that exercise of powers by the parent company must be in the capacity of majority shareho .....

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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 decid .....

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