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Draft Guiding Principles for determination of Place of Effective Management (POEM) of a Company

Income Tax - F. No. 142/11/2015-TPL - Dated:- 23-12-2015 - F. No. 142/11/2015-TPL Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Dated: 23rd December, 2015 Subject: - . Section 6(3) of the Income-tax Act, 1961, prior to its amendment by the Finance Act, 2015, provided that a company is said to be resident in India in any previous year, if it is an Indian company or if during that year, the control and management of its affairs is situated wholly in In .....

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y; or (ii) its place of effective management in that year is in India . 2. For the purposes of this clause, "place of effective management" means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made. 3. 'Place of effective management' (PoEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax tr .....

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ssued. 5. For the purposes of these guidelines, - (a) A company shall be said to be engaged in active business outside India if the passive income is not more than 50% of its total income and ,- (i) less than 50% of its total assets are situated in India; and (ii) less than 50% of total number of employees are situated in India or are resident in India; and (iii) the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure ; (b) Head Office of a company would .....

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associated enterprises; and (ii) income by way of royalty, dividend, capital gains, interest or rental income; (d) Senior Management in respect of a company means the person or persons who are generally responsible for developing and formulating key strategies and policies for the company and for ensuring or overseeing the execution and implementation of those strategies on a regular and on-going basis. While designation may vary, these persons may include: (i) Managing Director or Chief Executi .....

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management at any point of time. Since residence is to be determined for each year, POEM will also be required to be determined on year to year basis. The process of determination of POEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India. 7. The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India ifthe majority meetings of the board of directors of the co .....

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verage of the data of the previous year and two years prior to that shall be taken into account. In case the company has been in existence for a shorter period, then data of such period shall be considered. 8. In cases of companies other than those that are engaged in active business outside India referred to in para 7 the determination of POEM would be a two stage process , namely:- (i) . First stage would be identification or ascertaining the person or persons who actually make the key managem .....

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g the PoEM are as follows: (a) The location where a company s board regularly meets and makes decisions may be the company s place of effective management provided, the Board- (i) retains and exercises its authority to govern the company; and (ii) does, in substance, make the key management and commercial decisions necessary for the conduct of the company s business as a whole. It may be mentioned that mere formal holding of board meetings at a place would by itself not be conclusive for determi .....

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has de facto delegated the authority to make the key management and commercial decisions for the company to the senior management or any other person including a shareholder and does nothing more than routinely ratifying the decisions that have been made, the company s place of effective management will ordinarily be the place where these senior managersor the other person make those decisions. (b) A company s board may delegate some or all of its authority to one or more committees such as an e .....

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conduct of the board and the executive committee). (c) The location of a company s head office will be a very important factor in the determination of the company s place of effective management because it often represents the place where key company decisions are made.The following points need to be considered for determining the location of the head office of the company:- If the company s senior management and their support staff are based in a single location and that location is held out to .....

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meet when formulating or deciding key strategies and policies for the company as a whole. Members of the senior management may operate from different locations on a more or less permanent basis and the members may participate in various meetings via telephone or video conferencing rather than by being physically present at meetings in a particular location. In such situation the head office would normally be the location, if any, where the highest level of management (for example, the Managing .....

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elevant for the purpose of determination of POEM. (e) The use of modern technology impacts the place of effective management in many ways. It is no longer necessary for the persons taking decision to be physically present at a particular location. Therefore physical location of board meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made. In such cases the place where the directors or the persons taking the decisions .....

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o be determined on the basis of isolated facts that by itself do not establish effective management, as illustrated by the following examples: i. The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing PoEM in India have been satisfied. ii. The fact that one or some of the Directors of a foreign company reside in India will not be conclusive evidence that the conditions for establishing PoEM in India have been .....

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