The concept of ‘place of effective management’ (‘POEM’) for deciding tax residency status of a company other than an Indian company was introduced in the IT Act and made effective from April 01, 2017. The CBDT has now issued a notification on June 22, 2018 specifying certain exceptions, modifications and adaptations from the normal provisions of IT Act applicable in case of such companies regarding computation of income, set-off or carry forward of losses, collection and recovery and tax avoidance, to apply to a foreign company having POEM in India. These rules cover only such income of the foreign company which is taxable in India specifically due to the existence of the POEM of that company in India. Key points of the notification are as below:

i. Status and Tax Rate: The foreign company which is considered resident in India on account of having POEM in India will nevertheless continue to be treated as a foreign company for the purposes of the IT Act. In case of a conflict between the provisions applicable to such foreign company as a foreign company and as a resident, the provisions applicable as a foreign company will prevail. The tax rate applicable to a foreign company which is considered resident on account of having POEM in India is the same as applicable to any foreign company (40% plus applicable surcharge and cess) which is higher than the rate prescribed for domestic companies (30% plus applicable surcharge and cess).

ii. Tax withholding obligations on payments made to the foreign company: Where more than one tax withholding provision is applicable to the foreign company i.e. as a resident as well as a foreign company, the provision applicable as a foreign company alone will apply. Additionally, compliance to the tax withholding provisions as are applicable to the foreign company prior to its becoming a person resident in India would be treated as sufficient compliance of the tax withholding provisions.

iii. Credit for Foreign Taxes: The foreign company having POEM in India would be entitled for credit of foreign taxes against Indian income-tax liability.

iv. Carry forward and set-off of losses and depreciation allowance: The notification sets out detailed mechanism for off-setting accumulated losses and unabsorbed depreciation of the foreign company against its taxable income and for determining the written down value of depreciable assets in the hands of the foreign company.