Corporate residency reviewed as per the POEM test

The overwhelming sense of optimism following the BJP's landslide victory last year remains palpable. So too does the weight of expectation heaped on Prime Minister Narendra Modi's broad shoulders as India sits expectantly on the launch-pad awaiting economic lift-off. Against that kind of backdrop, the recent Indian Budget was always at risk of being a bit of an anti-climax - irrespective of its content!Despite the absence of “big bang” reforms, there was certainly plenty to get to your teeth into. The deferral of General Anti Avoidance Rules (GAAR) was a welcome, albeit not entirely surprising, move. Moreover, the clarification that these provisions would not apply retrospectively provided welcome certainty at a time when international investors are viewing India with renewed interest. Somewhat less certain are the details surrounding the significant changes made to the definition of “corporate residency” for tax purposes. The budget introduced a more subjective test focusing on the “Place of Effective Management”, or “POEM” as it has rather innocuously become known. However, unlike its literary namesake, Mr Jaitley's POEM is rather less of an aesthetic composition and the missing sonnets, which will explain exactly how it will be interpreted and implemented, are to be announced at an unspecified future date. Uncertainty once again reigns supreme Applicable from 1 April 2015, POEM has been defined to mean “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 is a sharp contrast to the more familiar, but firmly redundant, treatment of offshore companies as “non-resident” in India unless they are wholly controlled and managed from India.The implications are potentially very significant and far-reaching, impacting both outbound investment structures by Indian business families and private wealth structures such as personal holding companies. Under the new definition, therefore, a company could have been non-resident on 31 March 2015 and become resident the very next day resulting in its worldwide profits being taxable in India. To compound the issue, a foreign company is considered to be resident if its POEM is in India at any time in the prevailing financial year.Whilst there is still insufficient clarity on what would constitute the place where “key management decisions are in substance made”, the test itself has its basis in international principles, including those developed by the OECD. Therefore thereis precedent of a sort which, pending further clarification, provides at least some visibility on the kind of issues to be on the watch for! Whilst care should be taken to assess each individual case on its own merits, the following instances could indicate potential issues under the new POEM test:

• Residence of the majority of board members in India
• Board meetings being physically held in India
• Indian resident board members dialling into meetings rather than physically attending
• Lack of documentation to clearly demonstrate board meetings and management decisions outside India
• Indian residents having signatory rights on the bank accounts. The companywill need to demonstrate that the directors have approved key transactions ahead of them being transacted through the bank accounts. Inpractice this is challenging
• Lack of substance in the offshore company are there employees and physical offices
• The role and location of “advisors” is likely to be scrutinised especially if this is one of the shareholders