This document discusses the residential status of companies under Indian income tax law and the concept of place of effective management (POEM). It provides background on how a company's residence is determined, including that a foreign company can be deemed an Indian resident if its POEM is located in India. The document outlines guidelines for determining a company's POEM, including consideration of where board meetings are held, the location of assets/employees, and where key management decisions are made and implemented. Examples are provided to illustrate how POEM is assessed. The summary also discusses the tax rates applicable to domestic and foreign companies in India.
2. Residential Status Of A company and Tax
Incidences
A. Background
Section 6 of the Income tax Act, 1961 provide for conditions in which residence in
India is determined in case of different category of persons. Section 6(3) deals
with conditions to be satisfied for a Company to be treated as resident in India in
any previous year. Prior to the introduction of the concept of Place of Effective
management (POEM), a Company was said to be resident in India in any previous
year if it was an Indian company or during that year, the control and management
of its affairs was situated wholly in India. The Finance Act, 2015 amended the
above provision so as to provide that a Company would be resident in India in any
previous year if it is an Indian company or its Place of Effective Management
(POEM) in that year is in India. The POEM was defined to mean 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. In order to bring clarity
about the applicability criteria of certain Income tax provisions, the concept of
POEM has been deferred for one year the same has been made applicable w.e.f.
2016-17.
3. Residential Status Of A company and Tax
Incidences
B The concept of POEM is important to determine the residential
status of a foreign company operating in India. For Example, a
foreign company fulfilling the conditions of POEM will be deemed
as Indian Resident and the global income of such foreign company
is taxable in India. Residential Status of Companies under the
Income tax Act, 1961: Section 6(3) of the Income tax Act, 1961
provides that a Company is said to be resident in India in any
previous year if: The Company is an Indian Resident; OR Its place
of effective management, in that year, is in India. Place of Effective
Management (POEM) means a place where key management and
commercial decisions that are necessary for the conduct of
business of an entity as a whole are, in substance made.
4. Residential Status Of A company and Tax
Incidences
Analysis:
In case the Company is registered under the Companies Act, 2013
or any other previous Company law is termed as Indian Company
and the principles of POEM are of no relevance for such Company
since an Indian Company is always an Indian Resident.
Determination of whether the Place of Effective Management
(POEM) is India for any Company is relevant for foreign company
since the residential status will determine the vicinity of income
which will be taxable in India. For Example, in case of a foreign
company is having POEM in India, then the global income of such
Company will be treated as “taxable in India”.
5. Residential Status Of A company and Tax
Incidences
The percentage of tax rate will not be determined by the
residential status but Company needs to check whether it is a
Domestic Company or not. In case the Company is a Domestic
Company (i.e. Indian Company or any other Company which has
made prescribed arrangements for declaration and payment of
dividend within India), then the lower rate of tax i.e. 30% or 29%
or 25% (as the case may be will be levied) otherwise the income
will be taxable at higher rate of 40%. Needless to mention that
the tax is further increased by Surcharge and Cess as applicable.
The POEM is required to be determined each year since the
residential status is required to be ascertained each year. Circular
8/2017 dated February 23, 2017 issued by CBDT has clarified that
the provisions of POEM will not be applicable to a Company
having turnover of Rs. 50 crores or less in a financial year.
6. Residential Status Of A company and Tax
Incidences
C. Guidelines determining POEM (whether in India):
General Principle: The POEM in case of a Company engaged in active
business outside India shall be presumed to be outside India if the
majority meetings of the board of directors of the company are held
outside India.
Analysis:
Conditions when POEM in India is not applicable to a Company:
Company is engaged in active business outside India; and Majority of
Board Meeting are held Outside India.
Active Business Outside India: A Company is said to be active business
outside India if its passive income is not more than 50% of the total
income of such Company and:
♦ Assets in India are < 50% of the total assets (Assets will be taken as
average of opening and closing);
♦ Employees in India < 50% of the total employees
7. Residential Status Of A company and Tax
Incidences
C. Guidelines determining POEM (whether in India):
(No. of employees will be taken as average of opening and
closing);
♦ Payroll Expenses in India < 50% of the total payroll
expenses.
Passive Income means Income in relation to transactions of
purchase and sale with Associated Enterprises (AEs) or
Income generated from Royalty, Dividend, Interest, Rental or
Capital Gains.
8. Residential Status Of A company and Tax
Incidences
C. Guidelines determining POEM (whether in India):
It is to clarify that merely because the Board of Directors (BOD) follows
general and objective principles of global policy of the group laid down
by the parent entity which may be in the field of Payroll functions,
Accounting, Human resource (HR) functions, IT infrastructure and
network platforms, Supply chain functions, Routine banking operational
procedures, and not being specific to any entity or group of entities per
se; would not constitute a case of BOD of companies standing aside and
in such case also the BOD are considered to be effectively managing the
business of the Company.
The Company needs to analyze the data of assets, no. of employees etc.
in relation to the relevant previous year and two years prior to that
year in order to determine that whether Company is having any active
business outside India.
9. Residential Status Of A company and Tax
Incidences
Specific Principles: The Guidance further provides that in cases of Companies
other than those that are engaged in active business outside India referred to
in above, the determination of POEM would be a two stage process,
namely:
Stage 1: First stage would be identification or ascertaining the person or
persons who actually make the key management and commercial decision for
conduct of the company’s business as a whole (WHO TAKE THE DECISIONS).
Stage 2: Second stage would be determination of place where these decisions
are in fact being made (WHERE THE DECISIONS ARE IMPLEMENTED).
IN CASE THE DECISIONS UNDERTAKEN BY THE COMPANY ARE IN INDIA (NOT
SUCH DECISIONS WHICH ARE OF ROUTINE NATURE TAKEN BY MIDDLE OR
LOWER LEVEL MANAGEMENT) AND SUCH DECISIONS TAKEN BY THE BOD OR
SENIOR MANAGEMENT HAVE ACTUALLY BEEN IMPLEMENTED IN INDIA, THEN
THE POEM SHALL BE CONSIDERED AS IN INDIA AND THE COMPANY WILL BE
DEEMED AS INDIAN RESIDENT.
10. Residential Status Of A company and Tax
Incidences
Example: Company A Co. is a sourcing entity, for an Indian multinational group,
incorporated in country X and is 100% subsidiary of Indian company (B Co.). The
warehouses and stock in them are the only assets of the company and are located in
country X. All the employees of the company are also in country X. The average
income wise breakup of the company’s total income for three years is,
-30% of income is from transaction where purchases are made from parties which are
non-associated enterprises and sold to associated enterprises;
-30% of income is from transaction where purchases are made from associated
enterprises and sold to associated enterprises;
-30% of income is from transaction where purchases are made from associated
enterprises and sold to non-associated enterprises; and
-10% of the income is by way of interest.
-Solution: Since passive Income of the Company is less than 50% i.e. 40% of the total
income of such entity and both the assets and employees are working in country X,
therefore the Company is deemed to have active business outside India.
11. Corporate Tax Liability
• Corporation Tax popularly known as
Corporate Tax is a direct tax levied on the
net income or profit that corporate
enterprises make from their businesses.
The tax is imposed at a specific rate as
per the provisions of the Income Tax Act,
1961.
12. Corporate Tax Liability
• Updated Corporation Tax Rates for FY 2019-20 (AY 2020-21)
• The Finance Ministry has announced new corporate tax rates applicable from
1st April 2019 onwards for certain types of corporations*. The following are the
new rates that are applicable:
Type of Company New Corporation Tax Rate
Additional
Benefit/Requirements
Corporations not seeking any
incentives/exemptions
22% (earlier 30%) + applicable
cess and surcharge. Effective
corporate tax rate of 25.17%
No MAT (minimum alternative
tax) payable by these
companies
Corporations seeking
incentives/exemptions
Unchanged at 30%
MAT rate reduced to 15% from
earlier level of 18.5%
New Manufacturing Companies 15% (earlier 25%)
New manufacturing co. must
be incorporated on or before
October 2019. Must start
production before March 2023
*For all other types of corporations including foreign companies, the corporation tax rates
have remained unchanged.
13. Corporate Tax Liability
• Corporate entities that are liable to pay corporate tax in India are as
follows:
• Incorporated corporations in India.
• Corporations that acquire revenues from India and do business on
those earned incomes.
• Other foreign enterprises that have permanently established
themselves in India.
• Corporations that have earned the title of being an Indian resident
only for the purpose of tax payment.
14. Corporate Tax Liability
• Corporate Entities: Definitions and Types
• A corporate entity or corporation is an artificial person that is legally
considered to have certain rights and duties such that by law it has an
independent legal identity separate from that of its shareholders. India,
corporations are classified into two different categories as follows:
• Domestic Corporations- A company that is established in India and is
registered under India’s Companies Act, 2013 is termed as a Domestic
Corporate. Even a foreign company can be considered as a domestic
corporate if the Indian arm’s management and control is wholly based in
India.
• Foreign Corporations- In case of Foreign Corporation, as the name suggests,
a company that is situated overseas and not in India is called a foreign
corporate. Again, if some part of a foreign company’s management and
control is situated outside of India, then also it is called a foreign company.
• This distinction is important as domestic companies in India are charged
corporate tax on their universal income while foreign corporations get
charged tax only on the income they generate through their Indian
operations only.
15. Corporate Tax Liability
• Calculation of Net Income for Corporates
• Corporate tax is computed on the net revenue or net income of a
company. A net income/net revenue of a company is the total
amount left with the company after making necessary deduction of
various expenses. There are a host of expenses that a company incurs
for selling goods. These expenses are as follows:
• Depreciation.
• Total cost of goods sold.
• Selling expenditures.
• Expenses incurred for administrative purposes.
• The income of a company includes net profit earned from the
business, rent income, capital gains or income from other sources
such as interest income or dividend income.
• Thus Net Revenue = Gross Revenue – (Expenses + Depreciation)
16. Taxation of Not for Profit Organization
• Introduction
• Non-profit organisations are types of organisations which don't make
money for their members. All of the money raised or donated to a
non-profit organisation is used to fulfil the aims of the company and
to keep it going.
• Usually, charitable organisations are tax-exempt charities or other
forms of public benefit organisations, and as such are not expected to
pay any taxes. In a non-profit organisation, income is allocated to
leaders, executives, or officers of the company.
• Are non profits tax exempt in India?
Under amendments to Section 11(4A) of the Income Tax Act (1961),
an NPO is not taxed on income from a business that it operates that is
incidental to the attainment of the objects of the NPO, provided that
the entity maintains separate books and accounts with respect to the
business.
17. Taxation of Not for Profit Organization
• What are 3 purposes of non profit organizations?
• Here are three possible functions of a nonprofit:
• Charity or Social Welfare. ...
• Religious Functions. ...
• Trade, Research, and Education. ...
• Nonprofits Use All Revenue and Resources to Further Advance the
Organization. ...
• Nonprofits Benefit Social Welfare. ...
• Nonprofits Rely on Donations and Grants. ...
• Nonprofits Are Tax Exempt. ...
• UNICEF.
18. Taxation of Not for Profit Organization
• What are the 4 types of non-profit
organizations?
• A nonprofit organization can organize itself in four ways: an
unincorporated association, a trust, a corporation, or a
limited liability company. However, the IRS only recognizes
LLCs as nonprofit 501(c)(3) if all its members are 501(c)(3)
organizations
19. Tax on Distributed Profits
• Under the Income Tax Act, any domestic firm which is
distributing dividends has to pay DDT at the rate of 15 per
cent of the gross amount. At different times, governments
of the day have imposed and removed Dividend
Distribution Tax according to market needs.
• Is distribution taxable income?
• Dividends come exclusively from your business's profits
and count as taxable income for you and other owners.
General corporations, unlike LLCs, pay corporate tax on
their profits. Distributions that are paid out after that are
considered “after-tax” and are taxable to the owners that
receive them.
20. Tax on Distributed Profits
• The tax on distributed profits so paid by the company shall
be treated as the final payment of tax in respect of the
amount declared, distributed or paid as dividends and no
further credit therefore shall be claimed by the company or
by any other person in respect of the amount of tax so
paid.
• Is corporate tax a distributed profit?
• Tax is not levied on distributed profit under this section in
respect of any amount declared, Tax Distributed profit or
paid by the specified domestic company by way of
dividends to a business trust out of its current income.
21. References
• Suggested Readings
1.Ahuja,Grish,and Ravi Gupta,Corporate Tax Planning
and Management,BharatLawHouse,Delhi.
2.Singhania,Vinod K., Kapil Singhania,and Monica
Singhania, Direct Taxes Planning and
Management,Taxmann Publications Pvt.Ltd., New
Delhi.
3.Pagare,Dinkar,DirectTaxPlanningandManagement,Sul
tanChandandSons,NewDelhi.
4.S P Goyal, Direct Tax Planning, Sahitya Bhawan,Agra
5.Bare Acts of Relevant Enactments
