Case Study on “POEM” (Place of effective Management)
As per the tax laws in India, a resident is taxed on worldwide income; whereas, a non-resident is taxed only on the income which is received or accrues or arises in India or is deemed to accrue or arise in India. Recently, the concept of ‘POEM’ was introduced in Indian tax laws for determination of tax residency in case of Companies in India which is being used in tax treaties (DTAA) for long.
Part A: Facts of the Case Study
- I Co. is an Indian Company having Indian Promoters.
- F Co. is a Foreign Company registered in Hong Kong and a WOS Company of I Co.
- Co. is in business of importing goods mainly from its holding Company I Co. and supplying these goods to the Customers which are not related to F Co.
- Most of times, I Co. is directly sending the goods to the customers of F Co. and billing is made to F Co.
- None of the directors of I Co. are directors in F Co.
- F Co. Directors are drawing salaries and residing outside India.
- All the board meetings of F Co. are held outside India.
- F Co. is not having any employees in India.
- F Co. is not owning any assets in India.
Part B: What is POEM
2.1 Introduction
‘POEM’ is the concept introduced to determine the residential status of a Company in India from the AY 2017-18 and onwards. All Indian Companies (i.e. Company incorporated in India) are tax resident of India. All companies, other than, the Indian Companies are tax resident of India if its Place of Effective Management (POEM), in that year, is in India.
‘POEM’ means 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 concept of ‘POEM’ is prevalent in various countries in order to determine the residential status and is one of the criteria for determining the residential status in case of tie-breaker rule i.e. to resolve dual tax residency of foreign Companies by the host jurisdiction.
Hence, objective is to tax in India all the foreign companies which are managed from India in substance i.e. if ‘POEM’ of such companies is in India. In other words, objective is to trace and tax shell companies and such other companies created for retaining income outside India although real control and management of affairs are located in India but NOT the Indian multinational companies engaged in business activities outside India (ABOI).
2.2 Determination and Applicability of POEM
POEM – A Case Study
This case study is prepared by DSRV Team for academic purposes. No inferences in what so ever may be drawn from this content. However, your queries are always welcome at sanjay@dsrvindia.com
