Finance minister Arun Jaitley on Monday said that the so-called place of effective management (POEM) rules will be deferred by one year, prompting foreign companies in the country and those with overseas subsidiaries to benefit from the extended time to re-organise their businesses.
POEM refers to the location where key decisions necessary to conduct business are made. It is used internationally to determine the residence of a company incorporated in a foreign jurisdiction.
These rules were eagerly awaited by Indian and multinational companies for clarity on their residency status.
“There are various issues that could have contributed to such a decision, including the time table on implementation of universal accounting norms and also of giving foreign businesses time to prepare themselves,” said Riaz Thingna, director, Grant Thornton Advisory.
The concept, widely used in many countries, was first introduced in India in the Finance Act of 2015.
According to draft guidelines issued recently, 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.
The company will be considered to be engaged in active business outside India if the majority of its income, assets, employees and employee expense is from outside India. On the other hand, if the company’s directors are not exercising their powers of management and such powers are being exercised by either the holding company or any other person resident in India, then the place of effective management shall be considered to be in India.
A two-stage process will be followed for companies, where the person making key management decisions and the location where such decisions will be taken will be looked at.
For determining whether a firm is engaged in active business outside India, the average of the past three years’ data will be taken into account. This provision had triggered fears that it was similar to retrospective tax laws. The draft guidelines have specifics on how to apply the rules in case technology is used by directors to participate in a board meeting.
“It is no longer necessary for the persons taking decision to be physically present at a particular location,” the draft had said, adding that in such a case, the place of residency of the directors may also be important.
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