Place of Effective Management (POEM): Determining Tax Residence

Section 6(3) of the Income-tax Act, 1961 provides that a foreign company is treated as resident in India if its Place of Effective Management (POEM) is in India in any year. POEM is defined as the place where key management and commercial decisions necessary for the conduct of the business of an entity, as a whole, are in substance made.

POEM determination — two-step framework

CBDT Circular 6 of 2017 sets out a two-step approach:

Step 1 — Active Business Outside India (ABOI) test

If a foreign company has Active Business Outside India, the POEM is presumed to be outside India unless the majority of board meetings are held in India. ABOI is determined by:

• Passive income not exceeding 50% of total income
• Less than 50% of total assets situated in India
• Less than 50% of total employees situated in India or resident in India
• Payroll expenses on such employees being less than 50% of total payroll expenses

Step 2 — Where ABOI test is not met

If ABOI is not satisfied, POEM determination requires identifying the persons who actually make key management and commercial decisions for the conduct of the company's business as a whole, and determining where those persons usually make those decisions.

Key management and commercial decisions

The circular and subsequent guidance identify factors such as:

• The location where the board of directors meets and conducts substantive board business
• The location of the head office, where senior management is located
• Where the company's accounting records are kept
• Where major contracts are negotiated and signed

The test is one of substance, not form. A board that meets in a location but where decisions are actually made elsewhere will not establish POEM at the meeting location.

Threshold

POEM applies to foreign companies with turnover or gross receipts exceeding ₹50 crore in the financial year. Smaller foreign companies are outside the scope of the rules.

Consequences of POEM in India

If a foreign company is found to have POEM in India, it becomes a tax resident and is liable to tax in India on its worldwide income, subject to:

• Special transition provisions under section 115JH for the year of POEM determination
• Treaty relief under tax treaties — the tie-breaker rule typically defaults to POEM as well, but specific treaty articles vary
• Conversion of accounting records to Indian Income-tax Act methodology, with attendant book-tax differences

Practical situations

Common scenarios where POEM analysis is relevant include:

• Indian-headed groups with foreign subsidiaries — where the parent's Indian directors materially direct subsidiary decisions
• Foreign companies whose senior management has relocated to India
• Holding company structures where substantive activity is in India but legal seat is outside

Because the analysis depends heavily on facts and ongoing patterns of governance, contemporaneous documentation of where decisions are made and by whom is essential. Tribunal and High Court decisions in this area continue to evolve, and assessment-year-specific positions are routinely revisited.