Place of effective management in case of Company assesse in India and Tax Impact

1. PRESENTATION ON
POEM AND ITS
IMPLICATIONS ON
RESIDENTIAL STATUS
BY
RADISSON CONSULTING
LLP

2. CONCEPT OF POEM
IN INCOME TAX ACT 1961
IN CONTEXT OF RESIDENTIAL STATUS
OF A COMPANY

3. Position Before Finance Act 2015 and proposed amendments in Finance Bill
2015
Before :
As per Section 6(3), Company is said to be resident in India in any previous year if –
i. It is an Indian Company; or
ii. During that year, the control or management of its affairs is situated wholly in India.
Proposed :
As per Section 6(3), Company is said to be resident in India in any previous year if –
i. It is an Indian Company; or
ii. Its Place of effective management (POEM),at any time in that year, is in India.

4. Position after Finance Act 2015
As per Section 6(3), Company is said to be resident in India in any previous year if –
i. It is an Indian Company; or
ii. Its Place of effective management (POEM), in that year, is in India.
*THE WORD “ANY TIME” IS OMITTED IN THE ACT
Explanation to Section 6(3)
POEM means a place where key management and commercial decisions that are
necessary for the conduct of business of an entity as a whole or, in substance are made.

5. Reason of Amendment
 Due to the requirement in the earlier Law that whole of control and management
should be situated in India and that too for whole of the year, the condition has been
rendered to be practically impractical.
 A company can easily avoid becoming a Resident by simply holding a board meeting
outside India.
 This facilitated creation of shell company which where incorporated outside but
controlled from India.

6. Concept of POEM
 POEM is an internationally recognized concept for determination of Residence of a
company incorporated in a foreign jurisdiction.
 Most of the tax treaties entered into by India recognize the concept of “POEM” for
determination of residence of a company as a tie breaker rule as avoidance of double
taxation.
 The principle is recognized and accepted by Organization of Economic cooperation
and development (OECD) also.
 The OECD commentary on model convention provides definition of POEM to mean
the place where key management and commercial decisions that are necessary to
conduct of the entity's business as a whole, are, in substance, made.
 In Order to align the provisions of IT Act with DTAA’s entered into by India with other
countries and inline with international standards and as a measures to deal with
cases of creation of shell companies outside India but being controlled and managed
from India the law is changed.

7. Guiding Principles for determination of POEM
 In budget 2015 it was proposed that in due course, a set of guiding principles
would be issued for determination of POEM. No such guidelines have been issued
so far.
 Since Poem is an Internationally well accepted concept, there are well recognized
guiding principals for determination of POEM although it is a fact dependent
exercise.

8. Analysis of OECD guidelines, International Judicial Pronouncements &
Commentaries
 While determination of a place of POEM is a question of fact, it ordinarily coincides
with the place where the directors of the company exercise their power and authority.
(which will generally be where they meet)
 POEM is the place where the company “really keeps house and does business”.
Some of the factors taken into account this place includes:
i. Place of incorporation
ii. Place of residence of share holders and directors
iii. Where the business operation takes place
iv. Where the financial dealing occurs and
v. Where the seal and minute books are kept.

9.  In exceptional circumstances, the place where a controlling shareholder such as a
parent company makes its decisions may be relevant in determining where the
central management and control is located.
For Example : 3 wholly owned subsidiary companies where incorporated in Kenya. By
their AOA powers of management where located in Kenya and who could not validly hold
meetings in UK. However these Management Powers where not exercised by the local
directors who stood aside in all matters of real importance so that it was the board of
directors in UK which effectively made all the decisions. This resulted in subsidiaries
being held to be UK residence.
Analysis of OECD guidelines, International Judicial Pronouncements &
Commentaries

10.  What is decisive is not the place where the management directives take effect but
rather the place where they are given.
 It is the centre of top level management i.e. the place at which the person authorised
the company carries on his business management activities. If a controlling
shareholder does in fact manage the conduct of the companies business than that
share holder may be regarded as being in charge of the top level management would
appear to be the centre of management. However a place from a business is merely
supervised.
Analysis of OECD guidelines, International Judicial Pronouncements &
Commentaries

11. Limitations in a Modern technologically advance environment
 Due to sophisticated telecommunication and other technology such as video
conferencing or electronic discussion via the internet means it is no longer necessary
for a group of persons to be physically located to meet at one place to hold
discussion and make decisions.
 These increased mobility and function decentralization may have a significant impact
on the application of POEM rules.

12. Steps to manage changes smoothly
 In case if the group has presence in outside India through their subsidiaries and other
associates the concept of POEM becomes vital for determination of their residential
status thereby having tax impact in India.
 The group should revisit, review and structure (if required) their current structure
keeping in mind the POEM concept to avoid the tax burden due to change in
residential status.

13. Services we can Offer
 Reviewing current organisation structure, documentation, manner of taking material
decision during the previous year which can affect the residential status of the
company.
 Give opinion on the current structure specific to the applicability of the provisions
related to determination of residential status of the company.
 Advice on the documentation and other material support to substantiate company’s
claim regarding residential status.
 Advising on any other specific transaction affecting the POEM.

14. Contact Us
Corporate Office
A-005, Ground Floor,
Western Edge - II,
Kanakia Spaces,
Borivali (East),
Mumbai - 400 066.
Phone No. +91 22 4098 5400
+91 22 4098 5416
Email : info@radissonindia.in
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