POEM - Place of Effective Management

POEM as per Section 6 of Income Tax Act As Per Section 6 of the Income Tax Act’1961 (As Amended), It specifies that the Company will be said to be resident in India, if it satisfies the following condition It is an Indian company or Place of effective management is in India Two major criteria have been laid down for deciding the place of effective management and the criteria are as follows: Key Commercial and Managerial decisions are taken from that place It is taken in substance

Place of Effective Management (POEM) in India Corporate Taxation 2015 : Issues & Safeguards The India Budget,2015 has proposed the amendment of Section 6 of the Income Tax Act which alters the conditions under which a company is resident in India by including the concept of ‘place of effective management’ or POEM. Instead of the clause “during that year, the control and management of its affairs is situated wholly in India”, the new clause reads “its place of effective management, at any time in that year, is in India”. Even if for a short time the effective control is in India, that would make the company tax resident.

Adverse Consequences of POEM The Indian Government believes that the current conditions can easily be subverted by simply having local directors and holding board meetings outside India. This leads to the creation of shell companies which are incorporated outside India but controlled from India. the changes proposed by the government will involve practical difficulties which are highlighted in slides to follow.

Adverse Consequences of POEM Impact on Indian MNCs The power will have to be entirely delegated to an independent BOD abroad. The BOD abroad should only be associated with the foreign entity. This will increase the compliance cost for Indian companies. If it is determined that the key decisions of the foreign subsidiary are taken in India or if the key management personal like a director on the board resides in India then the foreign subsidiary will need to pay back tax to the Indian authorities. Subsidiaries which do not have any operations of their own will be especially impacted by the proposed amendment to the law.

Other Areas of Litigation in determining Poem Impact on Foreign MNCs Foreign companies with legitimate business outside India would end up being treated as an Indian Resident and may be subject to taxes in India on the global income if any of the directors participates in decision making process from India only in that single meeting. Other Areas of Litigation in determining Poem Mobile places of effective management Place of effective management in multi-jurisdiction Videoconferencing

POEM – Safeguards to be adopted Independent BOD for the foreign entity – The BOD should be an independent body and autonomous body. The decisions of the BOD should be well informed and duly deliberated. The deliberations should be well documented and recorded in the minutes of the meeting. The BOD meetings should be held only in the Foreign country. All strategic and major decisions should be taken in the board meetings held outside India. Preferably all directors should attend the meetings outside India.

POEM – Safeguards to be adopted In case the meeting is considered through video conference or teleconferencing, the host country’s corporate law is relevant for determining place of meeting in such cases. There should be absolute clarity on the business role and activities of the foreign subsidiaries and the same should be evidenced in the corporate documents. The corporate documents should provide all powers to the subsidiary the run the business activities on its own. All corporate documents such as minutes, registers, secretarial records etc. should be maintained in the registered office of the foreign subsidiary.

POEM – Safeguards to be adopted Parent company’s influence on the subsidiary should only be restricted to providing visionary direction. Parent company should not look to drive or steer the key activities of the subsidiary company. Parent company must exercise its powers in the capacity of majority shareholder to protect its interest but should not take control and run the subsidiary. The AGM should preferably be held in the country of incorporation of the subsidiary. The decision of appointing the directors in the subsidiary company should not be taken in India however, recommendations can be made by the BOD of the parent company.

POEM – Safeguards to be adopted Executive Directors, COOs, CEOs, CFOs and other key management personnel of the subsidiary should not be in India. The information about the international subsidiaries posted on the websites of the Indian company should be regularly reviewed. The powers of the Executive Directors and officers about taking any strategic decisions should be subject to approval BOD approval and should be well documented. All communications regarding management decisions and functions should be appropriately documented.