A company’s residence unquestionably depends upon its place of incorporation or registration. If a company is registered in India, that company’s residence is in India. Another criterion to prove residential status is its place of place of effective management (POEM), introduced in the budget 2015. According to this scale, if a company’s POEM is in India, the concerned company is a resident of India.
Importance of a resident company is that companies have to pay taxes in India if they have residence in India. Besides, the criteria for determination of residence of offshore companies become important in various circumstances involving majority ownership by Indian residents, including outbound investment structures by Indian business families and personal wealth/carried interest structures such as personal holding companies
Previous criteria- controlled and managed from India
Till financial year 2014-15, an offshore company has been treated as “non-resident” in India unless wholly controlled and managed from India. On many occasions, the place of control and management came under dispute and were settled in courts.
The Finance Act 2015 has tried to bring more clarity by proposing the POEM for the determination of residence of a company instead of the previous control and management.
POEM – the Finance Act 2015
According to the Finance Bill 2015, a company shall be deemed to be resident in India if its place of effective management (POEM) is in India. POEM has been 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”.
A foreign company will be considered tax resident in India if its POEM is in India at any time in the relevant financial year.
The POEM is a rather subjective test in determining residence. There is not enough clarity on what would constitute the place where “key management decisions are in substance made” i.e. whether the residence of directors will be looked at, location of board meetings or other criteria such as expansive veto rights by Indian resident shareholders.
The POEM is the same interpretation adopted in the commentary to the OECD Model Convention. The change is an important step in bringing the corporate residence test in line with global standards.
More subjectivity and hence clarifications are needed in future
However, while determining what factors carry more weightage in determining place of effective management; further clarifications are needed from tax authorities.
As per the earlier law, even in situations where an offshore company is 100% owned by Indian residents and has majority Indian directors, it has been held that there should be no residence in India if board meetings are held outside India. As per the Finance Act, 2015, even after considering the amendments made by Parliament, concerns continue as to whether such a company could be construed to be an Indian company by virtue of the fact that majority control is exercised by Indian resident persons. Similar concerns also apply where some portion of shareholding of the offshore company is held by non-Indian investors and Indian promoters exercise significant ownership and control.