India: CBDT Issues Final Guidelines For Determination Of ‘Place Of Effective Management'

Last Updated: 3 February 2017
Article by Ritu Shaktawat and Praneetha Vasan

In December 2015, the Central Board of Direct Taxes (CBDT) issued draft guidelines for determination of 'Place of Effective Management' (POEM) of a foreign company (Draft Guidelines) and had invited comments and suggestions from the stakeholders. The CBDT has on 24 January 2017 issued the final guidelines for determination of POEM (Guiding Principles).

The key features of the Guiding Principles are set out below.

Determination of POEM | Approach

  • Factual determination, based on 'substance' not the 'form', taking a holistic approach and a year to year determination
  • Primarily based on whether the foreign company is engaged in 'active business outside India'

The Guiding Principles provide that if a company is engaged in 'active business outside India', the POEM would be presumed to be outside India if the majority of the meetings of the board of directors of the company are held outside India.

A company can be said to be engaged in 'active business outside India' if its passive income (i.e. aggregate of income from transactions where both the purchase and sale of goods is from/ to its associated enterprises; and income from royalty, dividend, capital gains, interest and rental income) is not more than 50% of its total income and the following cumulative conditions are satisfied:

  1. less than 50% of its total assets are situated in India;
  2. less than 50% of the total number of its employees are situated in India or are resident in India; and
  3. the payroll expenses incurred on the employees situation/ resident in India is less than 50% of its total payroll expenditure.

For such determination, an average of the data of the relevant year and the preceding two years is to be considered (where the company has been in existence for a shorter period, then data for such period is to be used).

The Guiding Principles clarify how income, value of assets, number of employees and payroll expenses will be determined. The draft Guidelines were silent on these aspects:

Further, it has been clarified that interest will not be passive income in relation to a company engaged in the business of banking or a public financial institution, regulated under the laws of the country of incorporation.

Manifesting the 'substance' over 'form' principle, the Guiding Principles, however provide that if the facts and circumstances establish that the board of directors are standing aside and not exercising their powers, and that such powers are being exercised by either the holding company or any other person resident in India, then the POEM shall be considered to be in India. Importantly, the Guiding Principles further clarify that merely because the board of directors follows the global policy of the group laid down by the parent entity which is not specific to any entity, it would not mean that the board of directors is standing aside.

  • If the company is not engaged in active business outside India

The position under the Draft Guidelines has been finalised providing for a two stage process for determining POEM for companies other than those engaged in active business outside India viz.:

  1. Identification of the person(s) who actually make the key management and commercial decisions for conduct of the company's business as a whole; and
  2. Determination of place where these decisions are in fact being made; place where the decisions are implemented is of lesser importance.

The factors for such determination are:

Situs of the board meetings

The location of the board meetings would be considered as POEM of a company if the board retains and exercises its authority to govern the company; and makes key management and commercial decisions necessary for the conduct of the company's business, in such meetings.

Mere formal holding of board meetings at a place would not, by itself, be conclusive for determination of POEM being located at that place.

Delegation of authority by the board

In a case where the board has de facto (i.e. by conduct) 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, promoter, strategic, legal or financial advisor and does nothing more than routinely ratify the decisions that have been made, the company's POEM will ordinarily be the place where such senior managers or other persons make those decisions.

Further, in a case where a company's board delegates some or all of its authority to one or more committees such as an executive committee consisting of key members of senior management, the location where the members of the executive committee are based will be considered as the company's POEM. The term 'senior management' has been defined as the persons who are generally responsible for developing and formulating key strategies and policies for the company; and for overseeing the execution and implementation of those strategies on an on-going basis. These persons may include managing director, chief executive director, chief financial officer, financial director and heads of various divisions.

Location of Head Office

Like the Draft Guidelines, the Guiding Principles also provide that location of a company's head office will be a very important factor in determining the company's POEM because it often represents the place where key decisions are made. The relevant parameters in this regard are:

  • Centralised senior management- If the company's senior management and their support staff are based in a single location and that location is held out to the public as the company's principal place of business or headquarters then that location is the place where head office is located.
  • Decentralised senior management- If the company is more decentralized then the company's head office would be the location where these senior managers:
  1. are primarily based; or
  2. normally return to, following travel to other locations; or
  3. meet when formulating or deciding key strategies and policies for the company as a whole.

If the members of the senior management operate from different locations on a more or less permanent basis and participate in various meetings via telephone or video conferencing, the head office would normally be the location, if any, where the highest level of management and their direct support staff are located.

In a situation where the senior management is so decentralised that it is not possible to determine the company's head office with a reasonable degree of certainty, the location of a company's head office would not be of much relevance in determining that company's POEM.

Meetings through electronic mode

The Guiding Principles confirm the position under the Draft Guidelines which recognised the impact of modern technology on POEM. 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 or majority of them usually reside may also be a relevant factor.

Circular Resolutions

The Draft Guidelines were silent regarding circular resolutions. The Guiding Principles clarify that in case of a circular resolution or round robin voting, factors such as the frequency, the type of decisions made in that manner and location of the parties involved in those decisions are to be considered. The proposer of decision alone would not be relevant but based on past practices and general conduct, the person who has the authority to take decisions has to be identified.

Reserved Matters

While the Draft Guidelines were silent on this point, the Guiding Principles provide that the decisions of shareholders on matters reserved for shareholder decisions under the company laws are not relevant for determining the company's POEM. However, an exception is carved out for a situation when a shareholder has effective management over the company by way of a shareholder agreement or actual conduct, etc. which would result in limiting the authority of the board or senior management.

Secondary factors

The Guiding Principles provide that where the factors enlisted above do not lead to clear identification of POEM, then secondary factors such as the place where the main and substantial activity of the company is carried out; or the place where the accounting records of the company are kept, can be considered for determining POEM.

Factors not conclusive for determination of POEM

The following factors would not be conclusive for determination of POEM:

  • Day to day routine operational decisions undertaken by junior and middle management- The Guiding Principles provide further clarity by including instances to illustrate and distinguish between operational decisions on one hand and strategic and policy level decisions on the other hand. In situations where operational decisions are also taken by persons who are responsible for the key management, the POEM can be determined by distinguishing between the two types of decisions and assessing where the key management and commercial decisions are taken.
  • The determination of POEM is not to be determined on the basis of isolated facts that by itself do not establish effective management. For instance, the following factors should not be considered as conclusive of existence of POEM in India:
  1. a foreign company being completely owned by an Indian company;
  2. one or some of the directors of a foreign company residing in India;
  3. local management being situated in India in respect of activities carried out by a foreign company in India;
  4. existence of preparatory and auxiliary support functions in India; or
  5. existence of a permanent establishment of a foreign entity in India.

Procedural Aspects

In sync with the promise of establishing a non-adversarial tax regime and to avoid harassment in genuine cases, the Guiding Principles have further refined the 'checks and balances' provided for under the Draft Guidelines. A two-step procedure is now to be followed:

  • The Assessing Officer would first have to seek prior approval of the Principal Commissioner or the Commissioner before initiating any proceedings for holding a company incorporated outside India as being resident in India.
  • Once the approval is obtained and the Assessing Officer proposes to hold a company incorporated outside India as being resident in India, he would be required to seek prior approval of a collegium of three members consisting of the Principal Commissioner or the Commissioners which would be constituted by the Principal Chief Commissioner of the region concerned. Also, the collegium is required to provide an opportunity of being heard to the company before deciding the matter.

Khaitan Comment

Since the introduction of POEM as the criteria for determining corporate tax residency in India is effective from 1 April 2016, this guidance was critical and most awaited. The guidelines focus on 'substance' and are meant to guide the taxpayers as well as the tax administration through the process of determination of POEM. The guidelines require an overall and comprehensive review of factual position instead of a 'snapshot' approach. The attempt of the CBDT to address most of the concerns raised by stakeholders can be clearly seen as there is greater clarity in respect of aspects such as reserved matters, circular resolutions, factors for determining income or value of the assets, etc. It can also be seen that the intent of the provisions and guidelines is not to target Indian multinational corporations engaged in active business outside India but to target structures which are set up to retain income outside India while the real control and management of affairs is located in India. The Guiding Principles also contain illustrations to clarify application of tests in the stated circumstances. There are also sufficient checks and balances to ensure that there is no harassment to the taxpayers in genuine cases.

One would hope that the approach as set out in the Guiding Principles will be followed in letter and spirit for fair administration of POEM. With these guidelines in place, it will be interesting to see if the 'Controlled Foreign Corporation' regime would be introduced in the times to come.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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