Place of effective management: when does a foreign company run from India become an Indian tax resident?

The rule

Section 6 of the Income-tax Act, 2025 (carrying forward section 6(3) of the 1961 Act as amended in 2015) treats a company as resident in India in a tax year if it is an Indian company, or if its place of effective management in that year is in India. POEM is defined as the place where key management and commercial decisions that are necessary for the conduct of the business of the entity as a whole are, in substance, made. The test looks through the formal location of board meetings to where decisions are actually taken.

The CBDT guidelines

CBDT's guiding principles (Circular 6 of 2017, with Circular 8 of 2017 excluding companies with turnover of ₹50 crore or less) set out a two-stage approach:

1. Active business outside India (ABOI). A company has ABOI if its passive income (royalty, dividend, capital gains, interest, rental — and income from transactions where both purchase and sale are with associated enterprises) is not more than 50% of total income, and less than 50% of its assets are in India, and less than 50% of employees are in India or resident in India, and less than 50% of payroll is on such employees. For an ABOI company, POEM is presumed outside India if the majority of board meetings are held outside India — unless the board is shown to be standing aside and the decisions are in fact taken by executives or a holding company in India.
2. All other companies. Identify the persons who actually make the key management and commercial decisions, then determine the place where those decisions are made. The location of the head office, of the senior management, of board (or committee) meetings, and the use of technology to participate are all considered; day-to-day operational decisions and shareholder decisions are not "key management" decisions.

The guidelines note that a company's POEM is not in India merely because an Indian parent exercises shareholder influence or sets group policy — but a foreign subsidiary whose board merely ratifies decisions taken in India has its POEM in India.

Who is exposed

• Founder holding companies. A Delaware or Singapore company owned and run by India-resident founders, holding the Indian operating company or IP, with board meetings by video from Bengaluru. Passive income (dividends, royalties) and no employees abroad: no ABOI; decision-makers in India; POEM in India once turnover exceeds ₹50 crore.
• Offshore subsidiaries of Indian groups set up for treasury, IP holding or trading, managed from the Indian head office.
• Foreign companies whose CEO relocates to India and continues to run the business from here.

Consequences of POEM in India

The company becomes an Indian tax resident for that year: worldwide income taxable in India at the foreign-company rate; an Indian return, books and audit; withholding obligations on its own payments; transfer pricing on dealings with its (now) associated Indian enterprises; and potential dual residence, resolved under the treaty's tie-breaker (now, under the MLI, by competent-authority agreement rather than an automatic POEM rule for many treaties). CBDT has notified transition provisions on depreciation, losses and foreign tax credit for companies that become resident under POEM. For founders, the practical problem is that a foreign holding company resident in India loses the purpose for which it was created, while its investors expected a Delaware entity.

Managing the risk

1. Decide where the company should be managed, and manage it there: directors with genuine authority resident in that country, board meetings held there in person with substantive agendas and minutes, key contracts, banking and advisers there.
2. Avoid India-resident executives taking decisions by email that the foreign board ratifies later. Where India-based founders are directors, they travel for board meetings and the record shows decisions taken at those meetings.
3. For foreign subsidiaries with real operations, document the ABOI tests annually.
4. Track the ₹50 crore threshold; many founder structures cross it quietly through group consolidation or asset sales.
5. Where POEM in India is unavoidable, plan for it: the company may still be worth keeping for commercial reasons, but with Indian compliance from the outset.

Frequently asked questions

Sources

Primary sources only. Statutory text is read from the official publication; where a provision has been renumbered, the pre-2026 reference is given alongside so older material can be reconciled.

• Income-tax Act, 2025 and Income-tax Rules, 2026 — Income Tax Department, Tax Laws & Rules
• Double Taxation Avoidance Agreements — Income Tax Department

Last reviewed on 1 November 2026 by Suchit Jhunjhunwala, FCA, VMS Jhunjhunwala & Co. Law stated as at that date; the Income-tax Act, 2025 and Income-tax Rules, 2026 apply from 1 April 2026.

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