CBDT clarifies place of effective management guidelines

The Central Board of Direct Taxes (CBDT) issued a notification on 23 October to clarify the recent place of effective management (POEM) guidelines. The Finance Act, 2015, had amended section 6(3) of the Income Tax Act (ITA) to provide that a foreign company would be considered to be an Indian tax resident if its place of effective management is in India. This was made effective from financial year 2016-17 onwards. The CBDT released POEM guidelines in January 2017 laying down guiding principles to determine the place of effective management of foreign companies.

Stakeholders expressed concerns in cases of general and non-specific functions carried out by Indian regional headquarters of a multinational company. As per the POEM guidelines, a foreign company would be presumed to have its POEM outside India if (1) its active place of business is outside India; and (2) its board meetings are conducted outside India. However, the above presumption would not hold good if the board of directors of foreign subsidiaries stand aside in favour of exercise of control by their Indian holding company/shareholders/any other person resident in India, in which case the POEM would be considered to be in India. The POEM guidelines also stated that mere following of the global policy of the group laid down by the parent entity (in the field of payroll functions, accounting, human resource functions, IT infrastructure and network platforms, supply chain functions, routine banking operational procedures) would not constitute the board standing aside so long as the functions performed under the global policy was not specific to any entity or group of entities.

While the POEM guidelines addressed a situation involving foreign subsidiaries following the global policy laid down by its Indian holding company, it did not address the situation of an MNC having Indian regional headquarters with Indian employees that follow the global policy laid down by the MNC in relation to its subsidiaries/other constituents of the group company.

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