|Consultation on India’s New Definition of Tax Residency Extended|
The Indian government's consultation on its new criteria for tax residency of foreign-owned companies has been extended until 9 January.
The existing definition of tax residency states that a company is Indian tax resident if the control and management of its affairs is situated wholly in India. This allowed companies to avoid residency by shifting some minor or isolated events related to management to a location outside India, according to the Central Board of Direct Taxes' (CBDT) Draft Guiding Principles for determination of Place of Effective Management (POEM) of a Company.
The Finance Act 2015 amended the definition so that, with effect from April this year, it is determined by the company's place of effective management.
However, it was not until 23 December 2015 that the CBDT published its draft guidance on how a company's POEM should be determined. The deadline for public comment on the draft was set for 2 January.
The government received requests to extend this short consultation window leading to an extension of the deadline – although only until this weekend.
The draft guidance states that a company's POEM is the place 'where key management and commercial decisions that are necessary for the conduct of the business of an entity as a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' (para 2). This will also depend on whether or not the company is engaged in active business outside India, which in turn will depend on the volume of its passive income, the locus of its assets and employees, and its payroll. These numbers will be averaged over three years to determine the current POEM.
Companies not engaged in active business outside India will have their POEM determined by identifying the people who actually make the key management and commercial decisions for conduct of the company's business as a whole, and by determining the place where these decisions are in fact made. Other factors may be taken into account including where the company's accounting records are held.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Jan.14, 2016