POEM and Permanent Establishment: When Your Foreign Company Becomes Indian

Two exposures that get confused with each other

If you live in India, or expect to, and you own or run a company incorporated somewhere else, there are two quite different questions on the table and they are routinely merged into one.

The first is whether the foreign company itself becomes Indian tax resident. If it does, its worldwide income comes into the Indian charge — not just what it earns in India. That question is decided by the place of effective management, usually shortened to POEM.

The second is whether the foreign company, while remaining non-resident, has enough activity in India to create a permanent establishment or a business connection. If it does, only the profits attributable to that Indian activity are taxed here.

The difference in scale is enormous. One exposes the whole company; the other exposes a slice of it. The facts that create them overlap heavily, which is why people conflate them, but the analysis and the defences are not the same.

What makes a foreign company Indian-resident

Under section 6 of the Income-tax Act, a company is resident in India if it is an Indian company, or if its place of effective management in that year is in India. The statute defines that phrase as the place where key management and commercial decisions necessary for the conduct of the business of an entity as a whole are, in substance, made.

Three words in that definition carry the weight. Key excludes routine operational decisions. As a whole excludes decisions about one branch or one product line. In substance excludes the paperwork.

The test replaced an older rule under which a company was Indian-resident only if control and management of its affairs was situated wholly in India — a standard that could be defeated by moving a single isolated event abroad. Parliament introduced POEM through the Finance Act 2015, deferred its start through the Finance Act 2016, and it has applied since assessment year 2017-18. The Income-tax Act 2025, in force from 1 April 2026, carries the same concept forward; section numbering and terminology changed, but the residence principle did not.

Before you go further, check the size gate. CBDT Circular No. 8 of 2017 dated 23 February 2017 states that the POEM provision does not apply to a company with turnover or gross receipts of INR 50 crore or less in a financial year. Below that line the analysis stops.

The active business outside India test

For companies above the threshold, the guiding principles in CBDT Circular No. 6 of 2017 dated 24 January 2017 begin by asking whether the company is engaged in active business outside India. A company qualifies only if all of the following hold:

The limbs are cumulative. Failing any one of them takes you out of the active business category, and the data is measured as an average over the relevant year and the two years before it, so a single unusual year neither creates nor cures the problem.

Passive income is defined narrowly enough to matter. It is the aggregate of income from transactions where both purchase and sale of goods are with associated enterprises, plus royalty, dividend, capital gains, interest and rental income. A pure holding company whose receipts are dividends and interest from subsidiaries fails the first limb almost by construction.

The payroll limb catches owner-managers specifically. The circular's own illustration has a company with fifty employees, forty-seven of them abroad running the warehouse, and only three — the managing director, the chief executive and the sales head — resident in India. Headcount passes comfortably. But those three cost INR 3 crore of a INR 5 crore payroll, so the payroll limb fails and the company is not engaged in active business outside India. A small senior team living in India can break the test even when almost every employee sits abroad.

Board meetings are evidence, not a shield

Where a company does pass the active business test, the circular presumes its place of effective management is outside India if the majority of board meetings are held outside India. That is a real and useful presumption, and it is the reason board venue is worth planning.

It is not, however, a shield you can hold up on its own.

The same circular states that merely holding formal board meetings at a place is not conclusive. If the key decisions are in fact taken somewhere other than where the formal meetings happen, that other place is what counts — and it gives the example of meetings held in a location disconnected from the head office or from where the predominant activity is carried on.

It goes further on delegation. If a board has in practice handed the key management and commercial decisions to senior management, a shareholder, a promoter or an adviser, and does nothing beyond routinely ratifying what has already been decided, effective management sits where those people decide. Delegation to an executive committee is treated the same way, whether the delegation is formal or simply the way things have come to work.

Circular resolutions and round-robin voting are not a workaround either. The circular directs attention to how often that mechanism is used, what sort of decisions go through it, and where the person who actually exercises authority is located.

When the board is not really the board

For a company engaged in active business outside India, the presumption falls away if the directors are standing aside while their powers are exercised by a holding company or by any other person resident in India.

There is a helpful boundary drawn around this. Following general and objective principles of group policy — payroll, accounting, HR, IT infrastructure, supply chain, routine banking procedures — does not amount to the board standing aside, provided those policies are not specific to the particular entity.

What does cross the line is illustrated plainly. Where a foreign subsidiary must refer every contract above INR 10 lakh to its Indian parent for a decision, and virtually all its contracts are above that figure, the circular treats effective management as having been usurped, even though the subsidiary is in active business abroad and holds most of its board meetings outside India. Approval thresholds set low enough to capture ordinary trading are, in substance, a transfer of the decision.

For companies that do not qualify as active business abroad, the circular runs a two-stage enquiry instead: identify who actually makes the key management and commercial decisions, then find where those people make them. Where the answer is unclear, secondary factors come in — where the main and substantial activity is carried on, and where the accounting records are kept.

Equally, the circular is explicit that isolated facts do not settle anything. Complete ownership by an Indian company, the existence of a permanent establishment in India, one or some directors resident in India, local Indian management of Indian activities, and preparatory or auxiliary support functions in India are each stated to be non-conclusive on their own.

What follows if POEM lands in India

The consequence is residence, and residence brings worldwide income into the Indian charge along with Indian filing, withholding and documentation obligations.

Section 115JH of the 1961 Act, given effect by a notification issued in June 2018 and applicable from assessment year 2017-18, provides the transition machinery for a foreign company becoming Indian-resident for the first time. It sets how opening written-down values are established from the foreign jurisdiction's figures, how brought-forward losses and unabsorbed depreciation are determined year by year as at the start of the year of residence, and it limits set-off of those amounts to income that became chargeable in India only because the company became resident. Notably, it preserves the rate of tax applicable to a foreign company rather than moving the company onto domestic company rates. The equivalent provision has been carried into the Income-tax Act 2025.

There is a procedural safeguard worth knowing. An assessing officer must obtain prior approval of the Principal Commissioner or Commissioner before initiating proceedings to treat a foreign company as resident on POEM grounds, and any such finding requires prior approval of a collegium of three Principal Commissioners or Commissioners, which must give the company an opportunity to be heard. A POEM assertion is not something a single officer can impose without review — but nor is it something you want to be arguing about for the first time under enquiry.

Where a treaty applies, dual residence used to be resolved by a tie-breaker pointing to effective management. Where India and the other state both adopted Article 4 of the Multilateral Instrument, that tie-breaker is replaced by a mutual agreement procedure between the two competent authorities. Relief becomes something negotiated between revenue authorities rather than something you determine yourself when filing, and the timeline is measured in years.

Permanent establishment is the other half of the problem

Even when residence is not in issue, a foreign company can be taxed in India on Indian-attributable profits through a business connection under section 9 of the Act, or through a permanent establishment under the relevant treaty.

Treaty permanent establishment definitions typically cover a fixed place of business, and separately an agent acting in India who habitually concludes contracts or plays the principal role leading to their conclusion. Construction and service permanent establishments are usually defined by duration thresholds, and those thresholds differ treaty by treaty — the India–UK, India–UAE and India–USA agreements do not use the same periods, so the applicable treaty text has to be read rather than assumed. Activities that are genuinely preparatory or auxiliary are generally excluded.

India also taxes significant economic presence as a deemed business connection. Rule 11UD, notified in May 2021 and effective from 1 April 2022, sets the thresholds at INR 2 crore of aggregate payments from transactions in goods, services or property with persons in India, or three lakh users solicited or engaged in interaction. Where a treaty applies and a permanent establishment does not exist, the treaty generally governs, but the domestic nexus rule still shapes filing obligations.

For an NRI running a foreign consulting or trading business who spends substantial time in India, the practical risk is the agency and fixed-place limbs. Signing from India, negotiating from India, or maintaining a home office from which the business is habitually carried on are the facts that build a case.

Building the record before anyone asks

POEM is decided on facts accumulated across a whole year, and the circular expressly rejects a snapshot approach. It also provides that where effective management is found to be both in and outside India, it is presumed to be in India if it has been mainly or predominantly there.

That makes contemporaneous evidence the whole game:

• Minutes that show deliberation. Minutes recording that a decision was noted are weak. Minutes recording options considered, questions raised and reasons given are strong.
• Real directors abroad with real authority. Delegated authority limits should be set at levels that leave the foreign board deciding ordinary business, not referring it upward.
• Consistency between venue, head office and activity. Board meetings held somewhere unconnected to where the business actually runs invite the question the circular tells officers to ask.
• Travel and attendance records. Who attended from where, and by what means, is the factual spine of any later defence.
• Separation of your personal position. Your own residential status is decided independently; the RNOR window after returning to India does nothing to shelter a company whose effective management has moved.

Filing obligations follow all of this, and are covered in our guide to PAN and Indian return filing for NRIs. Where a treaty position is being taken, the documentation requirements are set out in our guide to DTAA relief and the Tax Residency Certificate.

Compliance caveat

This guide describes the place-of-effective-management test in section 6 of the Income-tax Act and the guiding principles in CBDT Circular No. 6 of 2017, together with the turnover exclusion in Circular No. 8 of 2017 and the transition provisions operated under section 115JH. It does not address transfer pricing, the general anti-avoidance rules, controlled foreign company treatment in other jurisdictions, FEMA and overseas investment rules — which are decided separately and can produce different answers — company law and directors' duties in the country of incorporation, or the attribution of profits to a permanent establishment. Section numbering under the Income-tax Act 2025 differs from the 1961 Act, and thresholds and conditions are stated in general terms and are subject to change at each Finance Act. This is a simplified guide, not tax advice. Global Investments is not authorised by the Financial Conduct Authority or by the Securities and Exchange Board of India. Confirm your position with a qualified Indian tax adviser and with counsel in the company's country of incorporation before acting on anything here.

How Global Investments can help

POEM problems are almost never discovered early. They surface when a business has already been run from India for two or three years and the record of how decisions were made is thin. Our advisers work with clients who own or manage companies incorporated outside India to map where key decisions are actually taken, test the active business limbs against real figures rather than assumptions, and identify whether the exposure is company-level residence, a permanent establishment, or both. Where the position is finely balanced, we coordinate with Indian tax specialists and with advisers in the country of incorporation so the analysis is run on both sides of the border at once, and we look at the company-level and personal exposures together rather than in isolation.