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as Articles (http://corporatelawreporter.com/legal/articles/) On Mar 15,2016

Introduction [1]

The Finance Act 2015 brought a new method for the taxation of a company in India
with the concept of PoEM. As per the concept, the company, whether foreign or
domestic, which has the place of effective management in India at any time of year
will be deemed to be resident of India and the global income of the company will be
taxed in India. This will check the rampant tax evasion which used to take place
earlier under the concept of control and management for determining the residential
status because in this the words “any time of the year” will make sure that the
company will not escape the taxation policies and will be taxed in India.

Place of effective management.

As per finance act, 2015 from April 1st 2016, the concept of POEM will replace the
“control and management” under Section 6 (3) of Income tax Act. With this
amendment, the tax provision of India will align with International standards (DTAA,
OCED to name few).

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7/22/2020 Place of Effective management: A critical analysis | Corporate Law Reporter

There was a(http://corporatelawreporter.com)

need of concept of PoEM because under the concept of control and
management even if some insignificant event took place outside India then also the
Companies Act 2013 (http://corporatelawreporter.com/companies-act-2013/)
company cannot be taxed in India as the control and management was not in India.
Corporate Law Referencer (http://corporatelawreporter.com/product/corporate-law-
Hence there was widespread tax evasion.
referencer_2019-20/)
Apart from Malasiya and after amendment India, no other country use the term “at any
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time in the year” under the concept of PoEM to describe the residential status of any
company.
Resolutions The word
eBook Place of Effective management means key management and
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Commercial and key decidion necessary for the business are taken.
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If a place is considered as POEM, then it can act as tie breaker in order to avoid
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double taxation as one country though can be resident in many countries, but under
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PoEM place of effective management can only be one. Tax will be paid only in the
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country which is the place of effective management even of incorporated or registered
in any other country.

It is necessary to define the actual POEM. It is a two stage determination process,

involving the following:

Persons taking the key managerial and commercial decision need to be identified

The place where such decisions are taken need to be identified.

Ramifications of PoEM

Let’s assume one company of USA holding only one meeting in India can be termed
as resident as per the concept of POEM and will have to pay tax in India

Another situation, a director of Australian company is on a vacation in India and

during that only he takes a very important commercial decision. In this case too, he
becomes a resident of India as per POEM

Indian MNC, having all its subsidiary outside India, but just once it takes its key
decision in India. By this its subsidiaries will be considered as a resident for that
particular year. Another problem with MNCS would be that they usually take
decision in different places. Hence it will be difficult to define their POEM.
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7/22/2020 Place of Effective management: A critical analysis | Corporate Law Reporter

In case of (http://corporatelawreporter.com)
video conferencing scheduled in different countries, again there will be a
problem in deciding which country to be chosen as the Place of effective
Companies Act 2013 (http://corporatelawreporter.com/companies-act-2013/)
management.
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There are two countries

referencer_2019-20/) which follow the concept of POEM. All the decisions take
place in one country except one. Now which country will be considered as POEM?
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If one considers
Resolutions the above examples then one may say that the
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not a good idea after all. But then the residence article of OECD Model Tax
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Convention i.e. Article 4 provides a tie breaker rule in determining the residence
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status.
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OECD model commentary mentions that PoEM is the place where key management
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and commercial decisions that are necessary for the conduct of the entity’s business
as a whole are in substance made.[2]

Few factors in determining PoEM are:

The place of board meeting is PoEM.

If the decision is left to particular committee, then the place where committee sits
and takes decision shall be considered as PoEM.

If the decisions are taken in head office, then the place where the head office is
situated shall be the PoEM.

In case of Video Conferencing or telephonic conversation, the place where

maximum number of directors is present shall be considered as PoEM. If such a
determination is not possible, then the place of residence of highest level Director is
PoEM.

If the above given situations are not there, then the place where substantial business
activity takes place or where the accounting records are kept will be considered as the
POEM for the purpose of applying for tax purpose.

Conclusion
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7/22/2020 Place of Effective management: A critical analysis | Corporate Law Reporter

It is concluded that though the concept of PoEM will make sure that the company
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cannot escape the taxation policies but sometimes it is difficult to determine the “place
Companies Act 2013 (http://corporatelawreporter.com/companies-act-2013/)
of effective management” in various cases. Moreover it is a burden on a company
Corporate Law Referencer (http://corporatelawreporter.com/product/corporate-law-
which if once in year take major decision in India then the whole global income will be
referencer_2019-20/)
taxed in India. Therefore it is yet to see how effectively the taxation system is going to
work under
Forms the concept of PoEM.
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[1] By: Rajnandini

Resolutions Shukla and Aishwarya Diwan, Students, 4th year, BA.LLB (Hons.)
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[2] Para 24 of Article 4(http://corporatelawreporter.com/wp-
of Commentary to the OECD Model Convention.

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