POEM & GAAR Advisory

Two anti-avoidance frameworks under the Income-tax Act, 1961 govern cross-border corporate structuring:

Place of Effective Management (POEM), s.6(3): a company incorporated outside India is treated as an Indian tax resident if its POEM is in India during the relevant year. CBDT Circular No. 6 of 2017 (24 January 2017) lays down the "Active Business Outside India" (ABOI) test — a foreign company is treated as having ABOI, with POEM presumed outside India, only if its passive income (from associated-enterprise transactions, royalty, dividend, capital gains, etc.) is 50% or less of total income, AND less than 50% of its assets, employees, and payroll expense are situated or based in India. CBDT Circular No. 8 of 2017 clarifies that s.6(3)(ii) does not apply to a foreign company with turnover or gross receipts of ₹50 crore or less in the relevant financial year.

General Anti-Avoidance Rule (GAAR), Chapter X-A (ss.95-102), effective 1 April 2017 (assessment year 2018-19 onward), read with Rules 10U-10UC, empowers tax authorities to disregard an "impermissible avoidance arrangement" that lacks commercial substance and is entered into mainly to obtain a tax benefit. Rule 10U carves out arrangements where the aggregate tax benefit to all parties, in the relevant assessment year, does not exceed ₹3 crore — GAAR does not apply below this threshold. POEM and GAAR frequently arise together in the same cross-border restructuring review, but are independent tests with independent thresholds.

POEM and GAAR advisory covers the two anti-avoidance layers of the international tax — the Place of Effective Management (POEM) under Section 6(3) of the Income-tax Act 1961, which determines whether a foreign company is resident in India by where its management and the decision-making actually sit, and the General Anti-Avoidance Rule (GAAR) under Sections 95 to 102 of the Act, which empowers the disallowance of the arrangements whose main purpose is the tax benefit. Together they are the rules that test the substance of the cross-border structures.

The POEM is the test of the foreign company's residence — a company incorporated abroad but managed from India is resident in India and taxed on its global income — and the GAAR is the test of the arrangements — the transaction that is structured mainly for the tax benefit can be disregarded with the consequences the Act provides. The structures that the international tax planning builds are the structures these rules examine.

The cost of an unexamined structure is the assessment that pulls the structure apart: the foreign company whose management was never documented and the residence that is determined against it, the arrangement whose main purpose was the tax benefit and the GAAR that disregards it with the tax and the interest. The documentation and the commercial substance are what keep the structure outside the rules.

This service is for multinationals and the Indian groups with cross-border structures. We assess the POEM position under Section 6(3) — the management and the decision-making, the board and the meetings — build the documentation that supports the residence position, review the structures against the GAAR under Sections 95 to 102, and restructure where the arrangements carry the tax-benefit purpose — so the cross-border structure stands on its substance.