Place of Effective Management

January 15,2016
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K.R. Sekar (Partner, Deloitte Haskins & Sells)

Summary of Recommendations

The concept of Place of Effective Management (“PoEM”) is a key factor in determining the residential status of a company in many countries.

In India, this concept has been introduced through Finance Act 2015. Just to give a flavor, the definition of a company resident in India has been amended. The amended definition reads as under:

A company is said to be resident in India in any previous year, if, (i) it is an Indian company; or (ii) its place of effective management, at any time in that year, is in India.

Explanation— For the purposes of this clause “Place of Effective Management” means 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.

This amendment has a great significance in the context of operations of Multi National Enterprises (MNEs) in India. It impacts both, MNEs having subsidiaries in India; and Indian promoted companies which have overseas subsidiaries.

Further to the amended definition, the CBDT issued draft Guiding Principles[1] laying down the guidelines for determination of PoEM. The CBDT has invited views on the draft by 9 January 2016. In this regard, some of the key recommendations that are further discussed in this paper, are summarized below:

  • An Indian company with wholly owned foreign subsidiary(s) should be allowed to file a consolidated income-tax return in India. Currently, the corporate law in India recognizes Indian companies to consolidate their financial statements. However, the current tax laws do not recognize consolidation of tax returns. Hence, this should also be allowed for income-tax returns as well for wholly owned subsidiaries. This should be an alternative to PoEM.

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