SKP Tax Alert
Volume 9 Issue 29 |
CBDT releases final guiding principles for the determination of POEM
The Finance Act, 2015 had amended the criteria for companies to be qualified as ‘resident in India’. According to the amended definition, a company would be a resident in India if it is an Indian company or its ‘Place of Effective Management’ (POEM), in that year, is in India.

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.

The Central Board of Direct Taxes (CBDT), on 23 December 2015, released a set of draft guiding principles to determine POEM which would benefit the taxpayers and tax administration. These draft guidelines for the determination of POEM were open for public suggestions/comments.

Given that the final guidelines were not released before March 2016, the applicability of POEM was deferred by one year and was made effective from
financial year 2016-17.

The CBDT, on 24 January 2017, released the final guiding principles for determining POEM.

The key differences between the draft guidelines (our alert on draft guidelines can be accessed here) and final guidelines are as follows:

Sr. No. Draft Guidelines Changes in Final Guidelines
  1. a)

POEM guidelines for companies engaged in Active Business Outside India (ABOI)

POEM of a company would be outside India if:
  • the company is engaged in ABOI, and
  • the majority of Board meetings are held outside India.

If the Board of Directors (BOD) are not exercising their powers and such decisions are taken by a holding company or other persons resident in India, the POEM would be considered as India.

The condition for BOD not exercising its powers has been relaxed to provide that adherence to global group policy will not result in BOD not exercising its powers.

If BOD follows general and objective principles of global policy laid down by the parent entity for the group as a whole (i.e. not for specific entities) in the field of payroll, accounting, human resources, IT infrastructure and network platforms, supply chain functions, routine banking operational procedures, then BOD would not be considered as not exercising its power.


A company would be engaged in ABOI if:
  • passive income ≤ 50% of the total income; and
  • assets situated in India < 50% of the total assets; and
  • employees situated or residents in India < 50% of the total number of employees; and
  • payroll expenses incurred on such employees < 50% of the total payroll expenditure.

For determination of ABOI, the average of the data of current Indian tax year and prior two years shall be considered.

Explanations have been provided for computing income, value of assets, number of employees and payroll expenses.

Specific guidance has been provided on data to be considered in case different tax years are followed.

In case the tax year of the foreign company is different from the Indian tax year, the average of data of such tax year ending in relevant Indian tax year and the two such tax years prior shall be considered.


Passive income of a company shall be the aggregate of:
  • income from transactions where both the purchase and sale of goods is from/to its associated enterprises; and
  • income by way of royalty, dividend, capital gains, interest or rental income.

It has been clarified that interest income shall not be considered as passive income for companies engaged in the business of banking or a public financial institution.

POEM guidelines for companies other than those engaged in ABOI

Determination of POEM - two stage process:
  • Identifying/ascertaining person(s) making key management and commercial decision for the company’s business as a whole; and
  • Determining the place where such decisions are in fact being made.

Thus, the place where management decisions are taken is more important than the place where such decisions are implemented.

Some guiding principles provided for implementing the above two tests are given below.
  • Place where Board meetings are held can be the POEM of the company, provided the BOD:
    • retains and exercises its authority to govern the company; and
    • in substance, makes key management and commercial decisions necessary for the conduct of business as a whole.
If key decisions are taken at a place different from the place of board meetings, then the place of taking decisions would be relevant for POEM.

If the authority to make key decisions is de facto delegated by the BOD to senior management or any other person (including shareholder) and BOD routinely ratifies such decisions, the POEM shall be at a place where these senior managers or other persons make decisions.
  • If the BOD delegates (either through resolution or agreement or by conduct) some or all of its authority to an executive committee consisting of key members of senior management, the POEM shall be at a place where these members are based and where this committee develops and formulates the key strategies and policies for mere formal approval of the BOD.
  • Location of the Head Office would be important for the determination of POEM. The points relevant for determining the location of Head Office are:
    • Location of senior management and their support staff based at a single location, which is held out to the public as the company’s principal place of business or headquarters.
    • In the case of decentralisation of senior management, the location where either senior managers are predominantly based or normally return to post travel or meet to formulate/decide key strategies and policies for the company as a whole.
    • In cases where the senior management participates in meetings via telephone or video conferencing, the location where the highest level of management and their direct support staff are located.
    • If the Head Office cannot be determined from the factors above, then the Head Office may not be considered for determining the POEM.

  • Day-to-day routine operational decisions undertaken by junior and middle management shall not be relevant for POEM.
  • If key management decisions are made without the physical presence of the BOD, the place where the directors or persons taking the decisions or the majority of them usually reside would be a relevant factor for the determination of POEM.
  • If the factors above cannot determine POEM, either the place where the main/substantial activity of the company is carried out or the place where the accounting records of the company are kept can be considered.

The additional clarifications provided on who is covered under other person, guiding principles for determining POEM and the illustration of commercial and routine decisions.

Any other person also includes promoter, strategic, legal or financial adviser.

Additional guiding principles provided for determining POEM:
  • In case of circular resolution/round robin voting – the frequency of use of such methods, type of decisions made in that manner and location of parties involved in decision-making would be considered. However, the proposer of the decision alone would not be relevant. Based on past practices and general conduct, the person who has the authority and who exercises the authority to take decisions needs to be determined. The place/location of such person would be more important.
  • The shareholders taking decisions reserved for shareholders would not be relevant for determining POEM if such decisions typically affect the existence of the company itself or the rights of the shareholders as such, rather than the conduct of the company’s business from a management/commercial perspective. However, whether shareholders are crossing the line resulting in effective management has to be decided on a case to case basis.
  • Routine operational decision is an oversight of day-to-day business operations and activities of a company. For example, the decisions by the plant manager appointed by senior management to run the facility, concerning repairs and maintenance, implementation of company-wide quality controls and human resource polices.
Whereas the key management and commercial decisions are concerned with broader strategic and policy decision affecting the company’s business as a whole. For example, –a decision to open a major new manufacturing facility or to discontinue a major product line.

If operational as well as key managerial decisions are made by the same person, then the location of the key managerial and commercial decisions are taken should be considered.

Examples of isolated instances that would not necessarily lead to conclusive evidence for establishing POEM
  • A foreign company is wholly owned by an Indian company.
  • One or some of the directors of a foreign company residing in India.
  • Local management situated in India (with respect to activities carried out by a foreign company in India).
  • Existence of support functions in India which are preparatory or auxiliary in nature.

Additional clarification has been provided that even the existence of a Permanent Establishment of a foreign entity in India is not conclusive evidence for establishing POEM in India.

POEM determination by the tax officer:

Prior approval of the Principal Commissioner or the Commissioner would be required by the tax officer in case he proposes to hold a foreign company as a resident in India based on its POEM. The taxpayer must be given the opportunity to be heard.

The revised process for holding a foreign company as a resident in India based on its POEM is given below:
  • The approval of the Principal Commissioner or the Commissioner is required even to initiate POEM proceedings.
  • To conclude the POEM in India, prior approval of the collegium of three members constituted by the Principal Chief Commissioner is required. The three members would consist of the Principal Commissioner or the Commissioners.
SKP's comments
It would be important to note that the press release issued by the CBDT mentions that POEM guidelines shall not apply to companies having turnover or receipts of INR 500 million or less in a financial year. However, the CBDT circular issued for the final guiding principles for determining POEM is silent on this aspect. It would be a big relief to small taxpayers if the threshold of INR 500 million is incorporated under the law or the appropriate clarification is issued.

The issuance of the final guiding principals on POEM is a welcome move by the CBDT. However, given that these guidelines have been issued in January 2017, it would have been ideal if these provisions would have been applied
prospectively from
financial year 2017-18 (i.e. assessment year 2018-19), which would have provided sufficient time to foreign companies having their POEM in India to carry out compliances required under the tax laws.

Also, the guidelines do not provide any guidance on compliance requirements for companies having a POEM in India, availability of tax credits, etc. These guidelines could largely affect Indian groups having subsidiaries overseas. Since the language used in guidelines is open to interpretation, there could be litigation with the Indian tax authorities on this issue. It would be advisable for corporates (mainly Indian groups having investment holding companies, trading companies for the group, etc.) to relook at their operations and ensure that they are compliant.

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