Recently, Government has issued fresh POEM guidelines to tackle shell companies evading tax in India under the veil of Foreign Residential Status.
So, What is this POEM all about and why do we need it?
POEM i.e. Place of effective Management is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction.
According to the guiding principles, “place of effective management” is defined as a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.
The intent is to target shell companies and companies which are created for retaining income outside India although real control and management of affairs are located in India.
In simple words, it targets those companies, which are created in countries with low tax rate regimes but have actual business going in India under Foreign Residency Veil. POEM rules will ensure that those companies which have effective place of management in India are taxed in India and do not avail benefits of lower rates or DTAA (Double Taxation Avoidance Agreements) with India by disguising themselves as Foreign Entity.
The concept of POEM for deciding the residential status of a company is in effect from this financial year beginning April 1, 2016, and accordingly shall apply from the assessment year 2017-18 onwards.
EXEMPTION TO COMPANIES O/S INDIA CARRYING ON ACTIVE BUSINESS:
Active Business Outside India (ABOI) test has been provided so as not to cover companies outside India which are engaged in active business.
Companies other than those that are engaged in active business outside India – Determination of POEM will be a two-stage process. The first stage would be identification or ascertaining the persons who actually make the key management and commercial decision for the conduct of the company’s business as a whole. The second stage would be the determination of place where these decisions are in fact being made.
Company engaged in active business outside India – The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
SOURCE – FINANCIAL EXPRESS