On 24 January, the Central Board of Direct Taxes released the final guidelines to determine the place of effective management (POEM) of foreign companies.
POEM is relevant in deciding the residential status of a company. The concept of POEM was introduced by the Finance Act, 2015, became effective from 1 April 2016, and is applicable from the 2016-17 financial year onwards.
Among other things, the POEM guidelines prescribe a test to determine whether a foreign company is engaged in an “active business outside India”. According to the guidelines, a company is engaged in active business outside India if: (a) its passive income is not more than 50% of its total income; and (b) less than 50% of its total assets are situated in India; and (c) less than 50% of its employees are situated in India or are resident in India; and (d) the payroll expenses incurred on such employees are less than 50% of its total payroll expenditure.
