Change in residency criteria for Companies - PoEM
MARCH 07, 2015
By Sarika Dhameja & Alpa Shah, Deloitte Haskins & Sells LLP
VIDE Finance Bill, 2015 the Finance Minister has proposed to amend section 6 of the Income-tax Act, 1961 (the Act). The proposed amendment provides that a company will be said to be resident in India in any previous year, if, it is an Indian company; or its Place of Effective Management (PoEM), at any time in that year, is in India.
Under the current provisions of the Act [Section 6(3)], a Company is treated to be resident in India if it is an Indian Company or during that year, the control and management of the affairs of a Company is situated wholly in India. Under the proposed amended section, an Indian Company will continue to be treated as a resident of India. The entities which could get impacted by this amendment would be Foreign Company having its place of business in India particularly those which are subsidiaries of Indian Companies. In such cases, if the PoEM of the Company is determined to be in India, the global income of such a Company can be brought to tax in India. Considering the precarious consequences of the proposed amendment, it is necessary that the concept of PoEM be explained in detail in the proposed guidelines to clear all the surrounding ambiguities to avoid unnecessary litigation.
Some of the uncertainties which surround the residency criteria with respect to PoEM of a company are as under:
1. The proposed amendment states that company is said to be resident in India in a previous year if its PoEM at any time in that year is in India.
This may be interpreted to mean that a Foreign company, even if holds a single board meeting in India, it may be said that the PoEM of such Foreign Company is situated in India and resultantly its worldwide income can be brought to tax in India.
The term PoEM is explained to mean a place of key management and commercial decisions necessary for the conduct of the business of an entity as a whole are, in substance made. Taking into consideration meaning of the term PoEM it may be interpreted that the key management and commercial decisions should be in context of the business of the entity as a whole. Hence, it may be debatable that merely because some of the key management and commercial decisions of the entity with respect to business in India are taken in India, the foreign company should not be considered to be resident in India.
2. Further, there are many aspects which need clarity such as ‘any time in that year', ‘ key management and commercial decisions', ‘as a whole', ‘in substance made', etc.
Setting out clear norms and tests for determining the PoEM may be a difficult task, however, unless, clarity with respect to the above issues are provided, determination of residential status of a company would only increase the already heaping litigation.
Further, a cursory look across jurisdictions reveals that there are many countries which follow similar criteria as proposed in India with respect to determining the residential status of a company. Some examples of countries which provide guidance as to the meaning of PoEM are tabulated below:
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Country
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Residency test and meaning of PoEM
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South Africa
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A company is resident in South Africa if it is incorporated, established or formed in South Africa; or has its PoEM in South Africa.
The expression “PoEM” is not defined for domestic tax purposes. South African Revenue Service (SARS) has published a non-binding Interpretation Note in 2001, according to which the PoEM refers to the place where the operative, day-to-day management of the company takes place, or where the company is managed by the directors or senior managers on a regular basis, regardless of where the overriding control is exercised or where the board of directors meets. However, subsequent local case law has interpreted the PoEM test differently from SARS . [ IBFD - Country Survey for South Africa]
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Mexico
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A company is a tax resident in Mexico if its PoEM is established in Mexico. A company will be regarded as having its PoEM located in Mexico when the persons taking or executing decisions concerning the company's control, direction, operation or administration and the company's activities are based within Mexican territory. For instance, if the Mexican company's Board of Directors or sole administrator is not based in Mexico, the company would be regarded as a non-resident. Moreover, even if the Board of Directors or sole administrator is based in Mexico, the company would be regarded as a non-Mexican tax resident if the persons executing the decisions are not based in Mexico. [IBFD - Country Survey for Mexico]
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Denmark
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A corporate entity is resident if it is registered in Denmark or, if it PoEM is located in Denmark. For the place of management test, the location of the day-to-day management is normally decisive. [IBFD - Country Survey for Denmark]
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As can be seen from the above, though many countries provide PoEM as a criterion for determining the residential status of a Company, principles that may result in a PoEM may differ in each jurisdiction. One of the reasons for introducing the PoEM concept for determining the residential status is stated to align the provisions of the Act with the Double Taxation Avoidance Agreements entered into by India with other countries and in line with international standards. As exemplified in the table above, there are varying explanations/definitions of PoEM worldwide. Having a definition which aligns to the international standards may be a difficult task. Nevertheless, in order to avoid litigation within India with respect to determining the PoEM of a company, clarity by the Finance Ministry, with respect to the above would be of utmost importance.
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