Place of Effective Management: When a Foreign Company Becomes Taxable in India

A company incorporated abroad isn't automatically outside Indian tax. If it's effectively managed from India, it can be treated as resident in India and taxed on its worldwide income. This is the place of effective management (POEM) test. This guide explains it.

The Rule

A company is resident in India if it's an Indian company, or if its place of effective management during the year is in India. POEM means the place where key management and commercial decisions necessary for the conduct of the business as a whole are, in substance, made.

Who's at Risk

• Founders in India running a company incorporated in the US, Singapore or elsewhere.
• Indian groups with foreign subsidiaries whose decisions are really taken in India.
• Holding companies abroad managed by Indian residents.

Official Guidance

Guidelines issued by the tax department explain how POEM is determined. Broadly:

• A company engaged in active business outside India is generally presumed to have its POEM outside India if the majority of its board meetings are held outside India.
• For other companies, POEM is decided by looking at where key decisions are actually made — by the board, or by others who in practice make them.
• The guidelines apply to companies above a turnover threshold.

Consequences

• The foreign company is taxed in India on worldwide income.
• It must file returns and comply with Indian tax requirements.
• Treaty tie-breaker rules may apply if it's also resident elsewhere.

Managing the Risk

1. Hold board meetings outside India, with real decision-making there.
2. Have directors with genuine authority based in the country of incorporation.
3. Document where and by whom key decisions are made.
4. Avoid informal decision-making in India that overrides the board.
5. Review the structure as founders relocate.

Getting Help

Think Filing reviews POEM risk for foreign companies managed by Indian founders and groups.