PoEM stands for the Place of Effective Management which is an internationally recognised test for the determination of the residential status of a company incorporated in a foreign jurisdiction. The concept of POEM is very crucial for all the taxes entered into India as it helps to avoid the scenario of double taxation. POEM is a finance bill introduced in 2015 which is a replacement for the word “ control and management”. PoEM is an amendment in the Income Tax act comply with overseas operations. The concept of PoEM is majorly established for the test of the residence of foreign companies. Any company under the PoEM amendment would be treated as an Indian resident company if its PoEM in the previous year is in India for tax purposes. The concept of PoEM has been used by different countries for determining the residential status of the recognised organisation in compliance with domestic law with international standards. However, the determination of POEM also depends on the various facts and circumstances of each case. The determination is to stick to the guidelines as prescribed by the CBDT. Furthermore, the determination of the POEM i done every year whereas the residency of the recognised organisation is also analysed annually.
Delving into the article will describe the different facts and circumstances based on the concept of POEM.
Under the circumstances of Place of Effective Management, a foreign company is considered an Indian resident company if the major control and management of the company’s affairs is situated in India.
So, to avoid double taxation, POEM brings to tax those companies that are incorporated outside India but majorly controlled from India. It is an Internationally recognised concept under the acceptance of Economic Co-operation and Development(OECD).
The residency of the foreign company is determined every year. So, a foreign company will be regarded as an Indian resident if its POEM is in India in that particular year. POEM must be determined every year based on different facts and circumstances. The concept of POEM explains a specific place where the key management and commercial decisions that are necessary for the business of an entity in a substance are made. So, to provide more clarity and address concerns, the concept of POEM is implemented. However, the Indian Revenue Department has issued circular guidelines that engage in active business outside India and others.
Permanent Establishment(PE)
In India, PE is described as a fixed place of business which clarifies that the business of an enterprise is wholly or partly carried out by an agent who habitually concludes contracts or regularly delivers goods on behalf of a non-resident entity. If the business enterprise doesn’t have any PE, it can be only taxed in the country of residence. If the business enterprise operates through a permanent establishment, it would be subject to taxation in the country where the PE exists. The role of permanent establishment.
Business Connection
The concept of business connection was amended under the Income Tax Act to align with the amended PE rules and regulations in compliance with the multilateral Instrument(MLI). The role of business connection is to include all the business activity carried out by a non-resident through the dependent agents. However, the scope of the business connection under the Income Tax Act aligns with the provisions made by the Dependent Agent Permanent Establishment(DAPE) in India’s tax treaties.
Furthermore, it also states that the contract should be
• Influenced by the name of the non-resident body
• For the ownership transfer for the granting of the right to use or the provision of services by the non-resident.
POEM is a double-purpose income tax act used to determine the residential status of an organisation. From the perspective of domestic law, it establishes a legal factor for several tax disputes. Moreover, if the POEM exists in India on behalf of any company, then it would be a subject matter of various other cases and tax laws. It also facilitates the appointment of Indian directors on the board of foreign companies and the participation of directors residing in India and attending meetings via telephone or video conferencing. So, if you want to get a detailed overview of the POEM Act, make sure to consult CA. Manoj K Pahwa, the best FEMA Consultant in Delhi, whose immense knowledge and experience will mitigate your queries.