Residential status of Indian and Foreign company

The residential status of the company is determined as per section 6(3) of the income tax act 1961. Residential status is important because the determination of income and income tax liability all depend on the residential status. It is a first step that every taxpayer must follow either a resident or non-resident.

Indian company

An Indian company is always a resident of India. It can never be a non-resident even if control or management is outside India or key management or commercial decisions are taken outside India. There is no such disputed and legislative hurdle in determining the status of an Indian company.

Foreign company

“Foreign company” means a company which is not a domestic company, but this definition is not as simple as it looks. Section 6(3) of income tax has specified that a foreign company is a resident company when ‘’its place of effective management, in that year, is in India’

Place of effective management (POEM)is further explained ‘’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.’’

Prior to the assessment year 2017-18 the residential status of the foreign company is determined on the basis of ‘’Control and management of affair if wholly situated in India’’. From the assessment year 2017-18 the determination test for residential status of a foreign company has changed from ‘Control and management’ to ‘POEM’.

POEM is an internationally recognized concept to determine the residential status of a foreign company. It aligns with provisions of the income tax act and DTAA signed by India with other countries. The focus point of the definition of POEM is “Key management and commercial decision’’, which becomes the supreme principle in determining residential status. The explanation of POEM is similar to the one used by The Organization for Economic Co-operation and Development (OECD) in its commentary.

Further Central board of direct tax (CBDT) has issued a set of guidelines for the determination of POEM. These guidelines are in detail and somewhere derail the provisions of the income tax act. It has been observed that being a part of most DTAAs, POEM is also used as a Tie-Breaker test to determine residential status. Tie-breaker rule determines which country has a right to tax a person as the country of residence.

Further, it is to be noted that a foreign company is said to be a non-resident whose turnover/gross receipt in the previous year is Rs.50 crore or less. Thus, a foreign company shall always be treated as a non-resident and POEM rule will not apply if its turnover/gross receipt is Rs. 50 crore or less.

Residential is determined with the help of the following chart-

CompanyResidential status
Indian companyAlways resident in India
Foreign company (with turnover/gross receipt Rs. 50 crore or less in a previous yearAlways non-resident
Foreign company (with turnover/gross receipt Rs. 50 crore or less in a previous yearIt is resident if POEM in the relevant previous year is in India

In the bench of justice S Ranganathan, D Lal, R Meena in the case of 220 ITR 377 authority for advance ruling (AAR) held that ‘’It is equally plausible to say that the word “place of effective management” refers to the place from where, factually and effectively, the day-to-day affairs of the companies are carried on and not to the place in which may reside the ultimate control of the company’’

POEM according to Klaus Vogel a leading author observed that POEM is a place where the top-level management decisions are actually made. The Supreme court of the Netherlands held that the residence of the parent company and its subsidiary company should be determined separately.

About the author: Nitin Bhatia is a qualified chartered accountant practicing in Delhi/NCR. He is the best CA in Gurgaon. During his professional journey, he has gained advanced experience in International Taxation, Transfer Pricing, Expatriate Taxation, Corporate Taxation, Domestic Taxation and litigation matters. International Taxation and Domestic taxation are his study topic, and he is deeply involved and updated with the recent judicial pronouncements. We are a team of expert tax advisors helping our client reach their goals by helping them to render efficient and legitimate tax planning.

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