Place of Effective Management(POEM) in India: A Complete Guide

India’s POEM framework is one of the most consequential and least understood provisions in the Income Tax Act 1961. A foreign company incorporated in Singapore, the UAE, Mauritius, or any other jurisdiction can be reclassified as an Indian tax resident for a given financial year if its place of effective management is found to be in India. That single finding brings the company’s global income into the Indian tax net, triggers Indian return filing, audit, and transfer pricing compliance obligations, and exposes prior years to potential penalties. In 2026, the income tax department is scrutinising cross-border structures more sharply than at any point since the provision took effect in FY 2016-17, particularly where Indian-resident directors are the sole decision-makers of a foreign entity.

What exactly is the place of effective management in India?

Under Section 6(3) of the Income Tax Act 1961, as amended by the Finance Act 2015 (effective from 1 April 2017), a company incorporated outside India is treated as a tax resident of India for a financial year if its place of effective management in that year is in India. The Explanation to Section 6(3) defines POEM as “a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance, made.” The operative word is “substance”: where decisions are actually made, not where they are formally recorded.

What POEM replaced and why the change was necessary

Before the Finance Act 2015, Section 6(3) of the Income Tax Act 1961 made a foreign company Indian-resident only if “the control and management of its affairs is situated wholly in India.” The word “wholly” gave planning professionals a simple lever: hold one or two board meetings outside India each year and the company escaped Indian residency entirely. Offshore entities were being used to park income earned from Indian operations in low-tax jurisdictions such as Mauritius, Singapore, or Cyprus while the real decision-making remained with promoters sitting in Mumbai, Bengaluru, or Delhi.

The Direct Tax Code 2010 first proposed the POEM concept. The Finance Act 2015 then formally introduced it by substituting “control and management wholly in India” with “place of effective management in India.” The Finance Act 2016 pushed the effective date to 1 April 2017 (AY 2017-18) to give businesses time to adjust. CBDT issued Circular 6/2017 on 24 January 2017 with detailed guiding principles, followed by Circular 8/2017 on 23 February 2017 clarifying the turnover threshold.

The structural intent is clear: India aligned with the OECD model convention tie-breaker test, which most Indian tax treaties already use to resolve dual-residency conflicts. A foreign company that is genuinely managed from a foreign jurisdiction has nothing to fear from POEM. The risk sits entirely with structures where India-based promoters run a foreign entity on paper from another country.

Who does POEM apply to, and who is outside its scope?

POEM applies only to companies incorporated outside India. It has no application to individuals, HUFs, partnership firms, or limited liability partnerships. A company incorporated in India is always treated as an Indian resident under Section 6(3)(i) regardless of where it is managed.

For foreign companies, CBDT Circular 8/2017 provides a material safe harbour: the POEM guiding principles under Circular 6/2017 do not apply to a foreign company whose turnover or gross receipts in a financial year are Rs 50 crore or less. This is broadly Rs 500 million or less. Where this threshold is met, the POEM scrutiny framework does not kick in for that year.

Three points on the threshold that are routinely misread:

• The Rs 50 crore figure applies to turnover or gross receipts of the foreign company, not the Indian group.
• The circular clarifies this is a threshold for the applicability of the guiding principles and not an absolute exemption from Section 6(3) itself. Technically, the section can still apply, though in practice the department has not pursued POEM for companies under this threshold.
• The threshold is tested each financial year. A company that grows above Rs 50 crore in FY 2025-26 moves into the POEM scrutiny framework for that year regardless of its history.

POEM is also relevant only for companies with an actual foreign connection. It is not a provision that applies to Indian domestic subsidiaries or branches.

The two-stage POEM determination under CBDT Circular 6/2017

CBDT Circular 6/2017 structures the POEM determination as a two-stage process based on whether the foreign company is engaged in an active business outside India (ABOI).

Stage 1: Is the company engaged in active business outside India?

A company is treated as having an active business outside India if it satisfies all four of the following conditions simultaneously:

ABOI test, four cumulative conditions

Condition	Threshold	What is measured
Income composition	Passive income is 50% or less of total income	Passive income includes dividends, interest, royalty, capital gains, and rental income
Assets	Less than 50% of total assets are situated in India	For depreciable assets, average of tax values at start and end of the year
Employees	Less than 50% of total employees are in India or Indian residents	Average of employee count at start and end of the year
Payroll	Payroll expense for India-based employees is less than 50% of total payroll	Cash or accrual basis, consistent with accounting method

All four conditions must be met. Failure on any single condition means the company does not qualify as having an ABOI.

For companies that do qualify as ABOI, there is a rebuttable presumption: if a majority of the board meetings in the financial year are held outside India, the POEM is deemed to be outside India. The presumption can be rebutted by the Assessing Officer (AO) if there is evidence that actual decision-making occurred in India despite the formal board meeting locations.

The three-year lookback rule, a frequently missed safe harbour

Circular 6/2017 specifies that for the income composition limb of the ABOI test, the data from the three immediately preceding financial years is used, not just the current year. Where a company has existed for fewer than three years, the data covers the entire period of existence. This matters in practice: a company whose passive income spiked above 50% in one year because of an exceptional dividend receipt may still satisfy the income composition test on the three-year average. This lookback applies to the income test only, the asset, employee, and payroll tests are assessed on the current financial year’s data. A company facing a borderline ABOI position should always run the analysis on the three-year income average before concluding that it fails the test.

How CBDT’s own worked examples resolve common grey areas

Circular 6/2017 contains worked examples that the CBDT uses to illustrate how the ABOI conditions interact in specific fact patterns. Two of these examples address situations that arise routinely in founder-held holding structures.

Example 1 from the circular: Company A is a sourcing entity incorporated in Country X, a 100% subsidiary of an Indian parent. Its warehouses and stock are in Country X. All employees are in Country X. The income mix shows 40% passive income (within the 50% threshold). But the payroll expenditure attributable to the MD, CEO, and sales head, all of whom are Indian residents, exceeds 50% of total payroll. Circular 6/2017’s conclusion: A does not satisfy the ABOI test because the payroll condition is failed. The entire POEM analysis then shifts to the Stage 2 “head and brain” inquiry. The lesson: the payroll test is the one that most commonly trips up structures where key personnel are Indian residents regardless of where the entity is incorporated.

Example 3 from the circular builds on the same facts and adds that all directors of A are Indian residents, and the board holds five meetings in a financial year, two in India and three outside India (two in Country X and one in Country Y). The circular’s conclusion: because A satisfies the ABOI test in this modified scenario (assume the payroll issue is resolved), and because the majority of board meetings are held outside India (three vs two), POEM is deemed outside India even though all directors are Indian residents. The lesson: for an ABOI company, the majority-of-board-meetings test is outcome-determinative and Indian-resident directors do not disqualify the company from a non-India POEM finding, provided meetings are physically held outside India in majority.

Stage 2: What if the company is not engaged in active business outside India?

Where the ABOI test is failed (passive company or mixed-income company with more than 50% passive income, or with India-heavy assets, employees, or payroll), the determination shifts to a broader facts-and-circumstances inquiry. The AO examines the “head and brain” of the company to locate where, in substance, key decisions were made.

CBDT Circular 6/2017 lists several factors relevant to this inquiry:

• Location of the board meetings of directors
• Location of the CEO and other senior management (CTO, CFO, Head of Sales, CMO) and their direct support staff
• Location where day-to-day management is exercised
• Location of the accounting records
• Place where the main and substantial activity of the company is carried out
• Place where the majority of assets are located

No single factor is decisive. The weight of each factor depends on the company’s business model and structure. Where management is actually delegated below board level, the POEM analysis follows that delegation.

What are key management and commercial decisions, and what is not POEM

A factual grey zone exists around what counts as a “key management and commercial decision” versus a routine operational or preparatory decision.

Key management and commercial decisions, for POEM purposes, are decisions necessary for the conduct of business as a whole. The circular and OECD commentary indicate these include decisions of the kind typically taken at board or senior management level: approving a new manufacturing facility, entering or exiting a major market, approving significant capital expenditure, setting pricing strategy, or authorising significant financing.

What the circular expressly says does not amount to POEM in India even if these activities are in India:

• Local management situated in India for India-specific activities of the foreign company (for example, an India country manager)
• Support functions that are preparatory or auxiliary in character (back-office, IT support, HR processing)
• A global advisory committee located in India providing non-binding advisory services

This is an important distinction for Indian groups with shared services centres or advisory functions in India. Their existence does not by itself create POEM risk if the actual commercial decision-making authority remains outside India.

How does the POEM inquiry actually begin?

CBDT Circular 6/2017 contains administrative safeguards to prevent fishing expeditions. The process runs in two steps.

First, an AO who suspects POEM may be in India must form a prima facie view based on material information and obtain prior approval from the Principal Commissioner or Commissioner before initiating any inquiry. This is not a mere formality, the circular requires the AO to have specific, documented reasons before inquiry is opened.

Second, if the AO, after inquiry, proposes to hold that a foreign company’s POEM is in India, the finding cannot be issued unilaterally. The AO must seek approval from a collegium of three Principal Commissioners or Commissioners constituted by the Principal Chief Commissioner of the relevant region. The collegium must provide the company an opportunity to be heard before issuing any direction.

This two-layer approval mechanism means POEM proceedings cannot be opened frivolously. In practice, it also means that companies with well-documented structures and clean board records are able to make a credible representation before the collegium stage.

Tax consequences when POEM is found to be in India

Once POEM in India is established, Section 115JH of the Income Tax Act 1961 (inserted by the Finance Act 2016, effective from AY 2017-18) governs the tax treatment. The CBDT’s Final Notification No. 29/2018 dated 22 June 2018 specifies the exceptions, modifications, and adaptations.

Key consequences under the current framework:

• The foreign company continues to be treated as a foreign company for tax purposes even after being classified as Indian-resident on account of POEM. All provisions applicable to foreign companies remain operative.
• The applicable tax rate remains 40% (plus applicable surcharge and education cess), which is the foreign company tax rate and not the lower domestic company rate. This is a significant cost: a domestic company today pays an effective tax rate of 25.17% (under Section 115BAA) whereas a foreign company deemed Indian-resident through POEM continues at 40%.
• The company’s global income becomes taxable in India for that year. Income that was being taxed only in the country of incorporation now faces double exposure until treaty relief or a foreign tax credit mechanism resolves the overlap.
• Indian compliance obligations attach: filing an income tax return, maintaining books of account in India on an April-March financial year basis (even where the foreign company follows a different year), Transfer Pricing documentation and reporting if it has transactions with associated enterprises, and potential Minimum Alternate Tax applicability.
• The notification provides a mechanism to bring in the written-down value of assets and carry-forward losses from the year the company first becomes Indian-resident on POEM grounds, but this requires alignment of the foreign company’s accounting periods to the Indian financial year.

What the Income Tax Bill 2025 changes

The Income Tax Bill 2025, introduced in Parliament in February 2025, replaces Section 115JH with Clause 220. The structural change is material: Clause 220 removes the transitional reliefs and CBDT-notified exemptions that Section 115JH permitted during the early years of POEM’s operation. Companies deemed Indian-resident under POEM from the bill’s commencement will face full global income reporting without access to the partial relief mechanism that the CBDT had built into its 2018 notification.

The Income Tax Bill 2025 also tightens the POEM framework by aligning it more explicitly with the BEPS Action Plan outcomes. This matters for structures built before 2017 that have been operating under assumptions derived from the older notification regime. Those assumptions do not carry over.

How POEM interacts with DTAAs, and where treaty protection breaks down

Most tax treaties entered into by India use POEM as the tie-breaker rule for corporate dual residency. Article 4 of most DTAAs provides that where a company is resident in both contracting states, it shall be deemed resident only in the state where its place of effective management is located.

This means that where India and, say, Singapore or the UAE both claim tax residency over a company, the treaty’s POEM tie-breaker applies. If POEM is found to be in India under the Income Tax Act 1961 analysis, the company loses treaty residency in the other jurisdiction and becomes fully Indian-resident under the treaty as well.

However, treaty protection breaks down in three common situations:

Limitation of Benefits clauses. Both the India-Singapore DTAA (post-2017 amendment) and the India-Mauritius DTAA (post-2016 amendment) contain Limitation of Benefits (LoB) clauses. A shell company or entity without genuine commercial substance in Singapore or Mauritius cannot claim treaty benefits. If the India Revenue determines POEM to be in India, the LoB clause typically also fails because the entity cannot demonstrate that its principal purpose is other than tax avoidance under the Principal Purpose Test (PPT) introduced by the Multilateral Instrument (effective October 2019 for India).

The “at any time” problem. Indian domestic law under Section 6(3) can treat a company as Indian-resident if POEM is in India “at any time” during the year. OECD model conventions and most DTAAs use a full-year or majority-of-year standard. This mismatch means a foreign company could be classified as Indian-resident under domestic law even where the treaty tie-breaker would assign residency to the other state, creating a risk of double taxation that the treaty does not cleanly resolve.

Non-treaty countries. Where India has no DTAA with the country of incorporation (certain free zones, some offshore jurisdictions), treaty relief is unavailable entirely. The company’s global income is taxable in India at 40% with only a unilateral foreign tax credit under Section 91 of the Income Tax Act 1961. This credit is limited to the lower of Indian tax and foreign tax paid.

The UAE-specific risk in 2026

Multiple advisory firms, including Treelife, are flagging a specific pattern: UAE free zone companies incorporated by Indian founders who are the sole or majority directors, with all board resolutions signed from Indian IP addresses via e-signature platforms. The UAE Federal Tax Authority introduced Economic Substance Regulations that mirror the POEM inquiry, if the UAE entity cannot demonstrate that key decisions are made in the UAE, the UAE ESR filing itself provides evidence to Indian tax authorities that management is not genuinely in the UAE.

Indian founders should treat POEM risk and UAE ESR compliance as linked, not separate.

What happens when both jurisdictions claim residency, using MAP

A particularly difficult scenario arises when the Indian tax authority determines POEM is in India while the other country’s authority simultaneously treats the company as resident there, and neither backs down through domestic proceedings. This dual-residency conflict is not resolved by the POEM finding alone. The mechanism for bilateral resolution is the Mutual Agreement Procedure (MAP) under Article 25 of the applicable DTAA.

Under MAP, the competent authority of India (the Central Board of Direct Taxes on behalf of the Revenue) and the competent authority of the treaty partner negotiate to determine which country’s residency claim prevails for treaty purposes. MAP can run parallel to domestic litigation in India and does not require the Indian proceedings to be stayed. Timelines for MAP resolution vary: India’s CBDT has been an active MAP participant under the OECD’s BMAP statistics framework, and bilateral resolutions with countries including the US, UK, and the Netherlands have been completed within 24 to 36 months in some cases.

For POEM-specific MAP cases, the company must provide evidence of its governance structure, board meeting locations, and management decision records to both competent authorities. Where the company’s documentation supports a non-India POEM position, MAP outcomes have generally been favourable. Where documentation is absent or inconsistent, MAP provides limited protection because the Indian competent authority has little factual basis to concede the case.

MAP is appropriate when: the POEM exposure is material (typically where global income subject to Indian tax exceeds Rs 1 crore for the year), the other country actively taxes the company as its resident, and domestic litigation in India appears unlikely to resolve within a reasonable timeframe. It is not a substitute for building a clean governance structure from the start, MAP resolves conflicts after the fact, at significant advisory cost, over multi-year timelines.

For Indian founders whose Singapore or UK holding company is facing simultaneous residency claims and who have a functional DTAA in place, Treelife’s international tax team has supported MAP filings in conjunction with domestic representation. Read the full analysis of how PE and POEM interact simultaneously in our Permanent Establishment Risk in India guide.

GAAR and the MLI Principal Purpose Test, why passing POEM is not the same as being safe

A company can satisfy the POEM test, its board meetings are held outside India, the ABOI conditions are met, and still face denial of treaty benefits under two overlapping anti-avoidance frameworks.

GAAR under Chapter X-A of the Income Tax Act 1961

General Anti-Avoidance Rules took effect from 1 April 2017 under Chapter X-A of the Income Tax Act 1961. GAAR empowers the Commissioner to declare an arrangement an “impermissible avoidance arrangement” if its primary purpose is to obtain a tax benefit and the arrangement lacks commercial substance, or is not at arm’s length, or is carried out in a manner not ordinarily employed for bona fide commercial purposes.

For cross-border holding structures, GAAR can override treaty benefits even where the POEM test is technically satisfied. A Singapore holding company incorporated solely to access lower withholding tax rates on dividends from the Indian subsidiary, with no genuine Singapore business, no local employees, and no customers outside India, can be challenged under GAAR regardless of where its board meetings are held. The Revenue does not need to establish POEM in India, it can deny the treaty benefit independently.

GAAR has a high burden of proof. The Revenue must establish that the arrangement qualifies as impermissible, and the Commissioner’s order is subject to review by a GAAR panel before it takes effect. However, once a GAAR finding is made, it can result in disallowance of treaty benefits, recharacterisation of the arrangement, and allocation of income or deductions to reflect the commercial substance that is absent.

The MLI Principal Purpose Test

The Multilateral Instrument (MLI), in force for India from 1 October 2019, introduced a Principal Purpose Test (PPT) into India’s covered tax agreements. Under the PPT, a treaty benefit is denied if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the arrangement or transaction, unless granting the benefit is consistent with the object and purpose of the applicable provision.

The PPT is broader than the GAAR and requires only that tax benefit is a principal purpose, not the sole or primary purpose. A Singapore holding company that has genuine commercial operations in Singapore but was also structured specifically to reduce Indian withholding tax on dividends can fail the PPT even if GAAR does not apply. The combination of LoB clauses (which require commercial substance) and PPT (which requires non-tax principal purpose) creates a two-layer test that most pure holding vehicles cannot satisfy.

For groups that have existing offshore holding structures, particularly those formed before 2017 when GAAR and the MLI were not in effect, a combined POEM, GAAR, and PPT review is the correct starting point. Satisfying the ABOI test does not mean the structure is fully protected. If your Singapore or Mauritius entity was incorporated primarily to access treaty benefits and has no genuine economic activity in that jurisdiction, the PPT risk is real regardless of your POEM position.

For Indian founders structuring a new offshore holding entity or reviewing an existing one, Treelife recommends reviewing the Flip Structure guide alongside this POEM analysis, the two frameworks interact, and a structure that passes POEM may still be challenged under GAAR or the PPT.

Annual POEM hygiene review: what to do before 31 March each year

POEM is not a one-time determination. Section 6(3) of the Income Tax Act 1961 assesses residency each financial year. A company that is outside POEM risk in FY 2023-24 can be inside it in FY 2025-26 if its business model shifted, if a key director relocated to India, or if the income mix moved toward passive. The following is a working checklist that the Treelife international tax team uses for annual POEM reviews.

ABOI test re-run (run by 31 December, using partial-year data, finalise by 31 March)

Item	What to pull	Risk trigger
Income composition	Draft P&L for the year; identify all passive income line items	Passive income approaching or above 40% of total income, run the three-year average
Asset position	Balance sheet at year start and year end; identify India-sited assets	India assets approaching 45% of total, assess whether any reclassification is appropriate
Employee count	HR records at 1 April and 31 March; flag India-resident employees	India headcount approaching 45% of total
Payroll split	Payroll register for the year; map gross cost by location of employee	India payroll approaching 45% of total payroll, restructure or engage local staff outside India

Board and governance review (quarterly, with year-end final check)

• Confirm board meeting schedule: for an ABOI company, majority of meetings must be outside India. Document the physical location of each meeting, not just the jurisdiction in the notice.
• Review board minutes: each minute should show agenda discussion, substantive deliberation, and resolution. A minute that records only “resolved as per agenda” is inadequate and will not withstand scrutiny.
• Confirm that no key decision was documented as having been taken in India outside a formal board meeting, email chains, WhatsApp messages, or Slack approvals that show India-based directors approving strategic decisions are adverse evidence.
• Review the management authority matrix: confirm that decisions above a defined threshold (capital expenditure, material contracts, key hires) require board-level approval from the overseas board, not from the Indian entity’s management team.

Management location check (run before any director changes take effect)

• If any overseas director is relocating to India, assess the impact on POEM before the move. A director who becomes India-resident mid-year triggers the ABOI payroll test for the proportion of the year they are in India.
• If the Indian entity’s CEO or CFO is also formally a director or officer of the foreign entity, review whether their India-based decision-making for the foreign entity creates POEM evidence.

Trigger events requiring immediate re-assessment outside the annual cycle

• The foreign entity’s gross receipts cross Rs 50 crore for the first time (moves into POEM scrutiny framework)
• A key management figure relocates from the foreign jurisdiction to India
• The foreign entity’s income mix shifts materially (for example, the entity stops active trading and becomes a passive holding vehicle)
• The Indian group receives an AEOI or FATCA information request that names the foreign entity
• A board meeting that was scheduled outside India is moved to India at short notice
• The foreign entity enters into a significant commercial agreement that is negotiated and signed from India

Documentation to assemble annually (maintain in a POEM file, not reconstructed on demand)

Minimum set: board meeting notices with physical location confirmed, signed board minutes for each meeting, payroll register by employee location, list of employees with India-resident flag, ABOI test computation using the three-year income average, management authority matrix, and a one-page POEM summary opinion signed by the company’s international tax advisor. Where a prior year POEM opinion was prepared, confirm that the underlying facts remain unchanged or update the opinion.

POEM risk audit, factors the tax department examines in practice

The following are the indicators that AOs and the collegium use when building a POEM case. A company that has multiple of these present in a financial year carries elevated risk.

High-risk indicators:

• All directors of the foreign company are Indian residents or Indian citizens
• Board meetings are formally held in the foreign jurisdiction but attending directors join by video call from India, and the majority are dialling in from India
• Resolutions are prepared by Indian counsel and signed by Indian-based signatories
• The foreign entity’s registered address is a virtual office or registered agent address with no physical presence
• The CEO, CTO, or Head of Finance of the foreign company also holds an equivalent role in the Indian entity and is based in India
• Strategic decisions such as hiring senior employees, signing major contracts, and approving budgets are documented internally in Indian-language emails or in Slack channels operated by the Indian entity
• The foreign company’s bank account transactions are authorised by India-based signatories
• The foreign company’s statutory accounts and tax returns are prepared by an Indian CA firm
• Less than 50% of gross receipts originate from genuine operations outside India

Lower-risk indicators:

• Majority of board meetings held physically in the foreign jurisdiction with directors present
• Key management personnel reside in the foreign jurisdiction and have employment contracts with the foreign entity
• The foreign entity has its own bank account managed locally
• Payroll for locally-based employees exceeds 50% of total payroll
• The foreign entity has its own lease, website infrastructure, and customer contracts in the foreign jurisdiction
• Decisions are documented in board minutes dated and physically executed in the foreign jurisdiction

Common mistakes that cost founders time and money

1. Treating the Rs 50 crore threshold as a permanent exemption

The Rs 50 crore relief under Circular 8/2017 applies each year based on that year’s turnover. Founders who set up a small holding entity and never revisit the structure as the entity grows often find themselves above the threshold years later without the documentation that would have been built had they been managing POEM risk from the start. By then, prior years without documentation become audit targets.

2. Confusing registered address with management location

A Singapore, Dubai, or Mauritius registered address does not create POEM outside India. What matters is where decisions are made in substance. Founders who incorporate offshore to “have a Singapore company” without any genuine operational presence create the textbook POEM risk scenario. The penalty for late filing of an Indian income tax return can reach Rs 10,000 under Section 234F; the bigger exposure is tax on global income at 40% plus interest.

3. Board minutes that do not reflect actual deliberation

Where all board members are Indian residents who meet by video call from India, the board minutes need to demonstrate that substantive deliberation happened, that the agenda included genuine commercial decisions, and that the decisions were made at that meeting rather than pre-determined in India. Generic minutes that simply record approval of pre-circulated resolutions are the first document an AO will challenge.

4. Allowing Indian-entity employees to make decisions on behalf of the foreign entity

Indian startups with a Singapore or UK holding company often use the same team for both entities. Where the Indian entity’s employees are authorising contracts, vendor payments, or hiring decisions on behalf of the foreign entity, this creates evidence that the “effective management” is in India even if the directors are nominally foreign.

5. Ignoring the interaction between POEM and transfer pricing

A foreign company that is eventually found to have POEM in India for a past year will face not just income tax on global income for that year but also transfer pricing scrutiny of all transactions between it and the Indian entity for that period. The adjustment exposure is compounded, and TP documentation that was prepared on a non-resident-to-resident basis may not be defensible on a resident-to-resident analysis.

Treelife practitioner note

In the cross-border structuring engagements we have run at Treelife, the POEM risk conversation tends to happen in two moments: at incorporation of the foreign entity, when it should be planned, or after an information notice from the income tax department, when the cost of remediation is several multiples higher.

The cases that concern us most are Singapore holding companies incorporated between 2018 and 2022 by Indian Series A and Series B founders, often to facilitate a Qualified Institutional Placement or a Delaware flip that did not complete. The Singapore entity went dormant or became a passive holding vehicle, passive income now constitutes more than 50% of its total income, and the four ABOI conditions are no longer all met. Under Circular 6/2017, the analysis then shifts to the “head and brain” inquiry. Where the founders are India-based and the Singapore board has never met physically, the facts are not favourable.

Under Section 6(3), POEM is assessed every financial year. A company that was outside POEM risk in FY 2020-21 may be inside it in FY 2025-26 if its business model shifted and the founders never revisited the governance structure. We run an annual POEM health check for cross-border groups, it takes two to three hours of document review, produces a written finding on each ABOI criterion, and flags specific remediation steps. For groups where POEM risk has crystallised in a past year, we work with litigation counsel to build a collegium representation that uses the CBDT’s own examples from Circular 6/2017 as the interpretive framework.

The Income Tax Bill 2025’s removal of transitional reliefs under the replacement for Section 115JH makes the 2026 financial year a critical window to clean up structures before the new regime takes full effect.

Case study: Restructuring a passive Singapore holdco before POEM crystallised

Situation: Series B SaaS founder, Bengaluru. Singapore private limited company incorporated in 2019 as a holding entity above the Indian operating subsidiary. Initial plan was to raise from a Singapore-based VC; the round did not close. The Singapore entity held shares in the Indian entity and a bank account with retained surplus.

Challenge: By FY 2024-25, over 70% of the Singapore entity’s income was dividend and interest income from the Indian subsidiary, clearly passive. All four directors were Indian residents. No board meeting had been held physically in Singapore since 2021. The company was over the Rs 50 crore threshold on combined revenue.

What Treelife did: Conducted a full ABOI test mapping against Circular 6/2017. Documented that the payroll and employee tests were failed alongside the income composition test. Advised on introducing a Singapore-resident independent director with genuine authority, formalising a Singapore-based service agreement for business development activities to shift the income mix, and restructuring two scheduled board meetings to be held physically in Singapore with proper pre-meeting agenda circulation. Prepared a governance protocol for board resolution processes.

Outcome: By end of FY 2025-26, the ABOI test was satisfied on three of four criteria. The income composition shift required an additional quarter but was on track. The founder avoided a potential POEM finding that would have triggered tax on the Singapore entity’s accumulated reserves at 40%, an estimated Rs 3.2 crore exposure, and avoided the compliance restructuring cost of migrating a deemed-resident foreign company to Indian financial year accounting.

FAQs

Q: Does POEM apply to foreign LLPs or partnerships formed by Indian promoters?
A: No. Section 6(3) of the Income Tax Act 1961 applies only to companies. An LLP, partnership firm, or trust incorporated outside India is not subject to POEM. These entities have separate residency tests.

Q: What is the tax rate if my foreign company is deemed Indian-resident through POEM?
A: Under Section 115JH, the tax rate remains at 40% (plus surcharge and cess applicable to foreign companies), the same rate as if it were a non-resident foreign company. The company does not benefit from the lower 25.17% rate applicable to domestic companies under Section 115BAA. (Section 115JH, Income Tax Act 1961; CBDT Notification No. 29/2018.)

Q: My company’s turnover is Rs 30 crore. Am I completely safe from POEM? A: CBDT Circular 8/2017 says the POEM guiding principles do not apply to companies with turnover or gross receipts of Rs 50 crore or less. In practice, the department has not pursued POEM for such companies. However, the exemption is from the guiding principles, Section 6(3) itself is not suspended. Companies under this threshold should still maintain reasonable governance documentation.

Q: How many years back can the tax department go for a POEM inquiry?
A: POEM is assessed year by year. Under Section 148/149 of the Income Tax Act 1961, assessment can generally be reopened up to six years from the end of the relevant assessment year (extended to ten years for income exceeding Rs 50 lakh relating to assets). A POEM finding in FY 2025-26 does not automatically create liability for prior years, but it will prompt the department to examine whether POEM existed in earlier years as well.

Q: Does participating in a board meeting from India by video call mean POEM is in India?
A: Not automatically. Circular 6/2017 acknowledges that technology makes physical presence unnecessary. What matters is where the decision-making authority substantively resides. If the majority of directors, by number and voting weight, routinely participate from India and substantive deliberation occurs while directors are in India, this is a risk factor. If even one or two India-based directors join an otherwise offshore-conducted meeting, the risk is lower but documentation of the offshore deliberation becomes critical.

Q: Can POEM apply even if I hold my board meetings outside India?
A: Yes, for passive companies. The board meeting location creates a presumption only for ABOI companies. For companies that fail the ABOI test (for example, more than 50% passive income), the analysis moves to the full “head and brain” inquiry regardless of where board meetings are held. If the CEO, CFO, and all senior management are India-based, board meetings in Singapore do not resolve the POEM question.

Q: What is the cost of a POEM finding for a company that has been holding reserves offshore?
A: Significant. Global income for the year, including accumulated profits that are distributed or deemed distributed, becomes taxable in India at 40%. Interest under Section 234B and 234C applies on shortfall in advance tax from the date instalments were due. Penalty under Section 270A can add 50% of the tax amount for underreporting. The total exposure can be several times the tax liability itself.

Q: If the DTAA gives my foreign company treaty residency in the other country, does POEM in India still apply?
A: If the treaty tie-breaker assigns POEM to the other country, the company is protected from Indian residency for treaty purposes. However, India’s domestic law can still assert residency. The practical protection depends on whether the other country’s tax authority also recognises the treaty residency and whether the company can use MAP (Mutual Agreement Procedure) to resolve the conflict. This is a live litigation area in India.

Q: Can an advance ruling help me get certainty on my company’s POEM status?
A: Yes. Applications are filed with the Board for Advance Rulings (BAR), which replaced the Authority for Advance Rulings (AAR) with effect from 2021 under Section 245Q of the Income Tax Act 1961. A BAR ruling is binding on the Revenue for the facts stated in the application. For POEM, the application must include a detailed statement of facts covering the company’s ownership structure, director details and residency, board meeting history with locations, income composition for the three preceding years, and the ABOI test computation. The BAR examines whether the facts, as stated, result in POEM being in India. Rulings typically take 6 to 18 months. The ruling is binding on the AO for the facts stated but does not protect against changes in the underlying facts in subsequent years. For groups where POEM exposure is material and the facts are unambiguous, BAR is significantly cheaper than fighting a POEM determination through the collegium, ITAT, and High Court route.

Q: When should we use MAP instead of domestic litigation for a POEM dispute?
A: MAP under Article 25 of the applicable DTAA is appropriate when: (a) the foreign company faces simultaneous residency claims from both India and the treaty partner country, (b) the other country is actively taxing the company as its resident and is not willing to defer unilaterally, and (c) the domestic India litigation timeline (ITAT to High Court) appears to run beyond three to four years. MAP does not require the domestic proceedings to be stayed, both can run in parallel. The competent authority of India (CBDT’s Foreign Tax and Tax Research division) and the competent authority of the treaty partner negotiate to reach an agreement. For treaty countries that are OECD MAP peers (US, UK, Netherlands, Singapore), MAP timelines have been under 36 months in a majority of resolved cases. Map is not available where there is no DTAA, and it does not apply where the other country does not claim residency. If both countries have effectively conceded that only one has a residency claim, MAP is unnecessary.

Q: What documentation should a foreign company maintain to defend a non-India POEM position?
A: At minimum: board meeting notices issued from the foreign jurisdiction; board minutes physically executed in the foreign jurisdiction showing substantive deliberation on commercial decisions; employment contracts for locally-based key management; payroll records showing where employees are based; lease or registered office agreement in the foreign jurisdiction; bank account statements showing local authorised signatories; and a management authority matrix showing which decisions require board approval versus local management authority. This documentation should be assembled and reviewed annually, not constructed after a notice is received.

Q: My company has two directors, one India-based, one in Singapore. What is my POEM position?
A: This is a common structure in early-stage international companies and is not automatically problematic. The analysis turns on whether the Singapore director has genuine decision-making authority or functions only to satisfy a formality while the India director takes all substantive decisions. If both directors are actively involved and meetings are held in Singapore or with substantive Singapore-side deliberation, and if the ABOI test is satisfied, the risk is manageable. If the Singapore director is a nominee who rubber-stamps decisions made in India, POEM is very likely in India.

Q: Does POEM interact with GAAR (General Anti-Avoidance Rules)?
A: POEM and GAAR are separate provisions but they often apply to the same structures. GAAR, under Chapter X-A of the Income Tax Act 1961 (effective 1 April 2017), can override treaty benefits where the principal purpose of an arrangement is to obtain a tax benefit. A structure that barely passes the POEM test but has no genuine commercial substance outside India can still be challenged under GAAR. The Principal Purpose Test in India’s treaties (via the MLI) operates similarly. Groups should assess both, not just the POEM test in isolation.

Q: What does the new Income Tax Bill 2025 change for foreign companies deemed resident through POEM?
A: Clause 220 of the Income Tax Bill 2025 replaces Section 115JH. The key change is the removal of transitional reliefs and CBDT-notified exemptions that the 2018 notification provided. Companies deemed Indian-resident under POEM from the bill’s commencement will face mandatory full global income reporting without access to the partial relief mechanism. The effective date and final text of the bill will need to be confirmed against the gazette notification when enacted.

Regulatory references:

• Section 6(3), Income Tax Act 1961, as amended by Finance Act 2015 (effective 1 April 2017): definition and test for corporate residency of foreign companies
• Explanation to Section 6(3), Income Tax Act 1961, definition of “place of effective management”
• Section 91, Income Tax Act 1961, unilateral relief from double taxation where no DTAA applies
• Section 115JH, Income Tax Act 1961 (inserted by Finance Act 2016), special provisions for foreign companies deemed resident in India on account of POEM
• Section 245Q, Income Tax Act 1961, application to the Board for Advance Rulings for binding advance rulings on POEM and other questions
• CBDT Circular No. 6 of 2017, dated 24 January 2017, guiding principles for determination of POEM, including the ABOI test, three-year lookback for income composition, and worked examples