The new year has commenced with a heated debate on whether India is right in treating an offshore company as tax resident in India if its place of effective management is established in India. The natural corollary to this principle, which was brought in by an amendment to the income tax laws by the Finance Act, 2015, is that pursuant to such determination, the global income of such an offshore company would be taxable in India.
Who Should Take Notice?
Offshore subsidiaries of Indian residents or corporate entities should be aware of the Draft Place of Effective Management Guidelines (POEM Guidelines) promulgated by the Central Board of Direct Taxes (CBDT) in India. It is important to note that these guidelines are still subject to stakeholder comment and finalization.
What Do the POEM Guidelines Purport to Do?
Simply put, the POEM Guidelines task the tax authorities to annually obtain facts on the management and control structures of offshore companies and ascertain if they are engaged in active business outside India. A company will be deemed to be engaged in active business outside India if its income from purchase and sale of goods from its associated companies, royalty, dividend, capital gains, interest or rent is not more than 50 percent of its total income. In addition, such an offshore company needs to satisfy that less than 50 percent of its total assets and employees are situated in India.
Therefore, for a company engaged in active business outside India, its POEM will be presumed to be outside India if the majority of the meetings of the board of directors of the company are held outside India. However, if it is established that the board of directors are not exercising their powers of management, and such powers are being exercised by either the holding company, or any other person resident in India, then the company’s POEM shall be considered to be in India.
If a company is not engaged in active business outside India, the POEM Guidelines require: (1) identification of the persons involved in making key management decisions; and (2) determination of the place where such decisions are being made. Some illustrative factors, including the location of the meeting of the board of directors, the executive committee (if any) and the head office, will guide the taxman in determining the POEM of such a company.
Will You Be Told Overnight That Your Offshore Company Is Tax Resident in India?
No. The tax authorities pursuant to the POEM Guidelines will need to provide companies with an opportunity to present their side of the picture before making the determination.
Potential Future Course
Those companies likely impacted by the POEM principles may want to carry out a holistic factual analysis on the governance structures of their offshore entities and revisit them from the prism of the POEM Guidelines. The key goal of the POEM Guidelines is to weed out substantive structures from structures in form to shelter offshore proceeds from Indian taxation. As an aside, the POEM Guidelines are a step in reducing adversarial tax litigation and providing a pathfinder with regard to the direction that the tax authorities will take.