A S BANKA ADVISORS

Set up a company in Dubai or Singapore, run it from a laptop in Bengaluru, and you may have created an Indian tax resident without meaning to. The rule that decides this is Place of Effective Management, or POEM. It is the test that turns a foreign company into an Indian tax resident, taxable here on its worldwide income. With the Income-tax Act, 2025 in force from 1 April 2026, the residence rule has moved from Section 6(3) of the old Act to Section 6(10) of the new one. For any founder with an overseas holding company, this is the moment to check where the business is really run from.

The one line that matters

A company is resident in India in a year if it is an Indian company, or if its Place of Effective Management is in India in that year. An Indian-incorporated company is always resident. A company incorporated abroad becomes resident only when its effective management, in substance, sits in India during the year. Residence matters because a resident company is taxed in India on its global income, while a non-resident is taxed only on income that arises in or is received in India.

What changed on 1 April 2026, and what did not

The governing statute changed; the test did not. For FY 2025-26 and earlier, residence is decided under Section 6(3) of the Income-tax Act, 1961. From FY 2026-27 onward, it is decided under Section 6(10)(a) and (b) of the Income-tax Act, 2025. The statutory definition of POEM is word-for-word identical in both Acts. What this means in practice is that your citation must now be period-aware: refer to Section 6(3) of the 1961 Act for years up to FY 2025-26, and to Section 6(10) of the 2025 Act from FY 2026-27. Getting the section wrong on a file does not change the answer, but it signals a residence position that was never properly reviewed.

Status of the rule: company residence via POEM is in force under Section 6(10)(a) and (b) of the Income-tax Act, 2025, effective 1 April 2026 for FY 2026-27 onward; for FY 2025-26 and earlier the governing provision is Section 6(3) of the Income-tax Act, 1961.

The two words that decide cases

The Income Tax Department text of Section 6(10)(b) defines place of effective management as the place where key management and commercial decisions necessary for the conduct of business of the company as a whole are, in substance, made. The two words that decide real disputes are “key” and “in substance”. POEM is not about where routine operations happen, where the registered office sits, or where a board meets on paper. It is about where the genuine strategic decisions are actually taken. A board that meets in Singapore but rubber-stamps decisions already made in India is exactly the fact pattern that creates exposure.

The ABOI safe harbour and the Rs 50 crore relief

To keep genuine operating businesses out of the net, CBDT Circular 6/2017 built the Active Business Outside India test. Broadly, a company has active business outside India where its passive income is not more than 50 percent of total income and less than 50 percent of its assets are in India, together with tests on the share of its employees and payroll in India. Passive income here means royalties, dividends, interest, capital gains and related-party income. For a company that clears this test, POEM is presumed to be outside India if most board meetings are held abroad, unless real authority is actually being exercised from India.

Separately, CBDT Circular 8/2017 keeps the POEM guidelines out of reach for a company with turnover or gross receipts of Rs 50 crore or less in a financial year. For most early-stage startups and small holding companies, that relief means the heavy guideline analysis will not bite. It does not switch off the statutory residence test itself. One important caveat for advisers: both circulars were issued under the 1961 Act. Because the 2025 Act carries the POEM definition forward unchanged, that guidance continues to inform analysis, but it is prudent to confirm whether CBDT re-issues or updates the ABOI test and the Rs 50 crore relief under the new Act before relying on them for FY 2026-27 and later.

What it costs if you get it wrong

If a foreign company is held to have its POEM in India, it becomes a resident. It is then taxed in India on its worldwide income, must file Indian corporate tax returns, and falls within the transfer pricing and withholding regime. At that point, foreign tax credit rules and the tie-breaker article of the applicable tax treaty become critical to avoid being taxed twice on the same income. This is not a theoretical risk. It is the natural consequence of incorporating a holding company abroad for fundraising or IP, and then running every real decision from India over video calls.

A founder’s action checklist

Map where your foreign company’s key decisions are actually made, not where the office or accountant sits. Hold real board meetings in the home jurisdiction, with directors who genuinely participate, and keep minutes that show the decisions were taken there. Appoint at least one director who is genuinely resident and active in that jurisdiction, with real authority. Keep local bank signatories and financial approvals in the home jurisdiction. Document major decisions in a board pack that would stand up to a POEM enquiry. Test yourself against the ABOI factors and the Rs 50 crore threshold, and take a position in writing. Finally, read the tie-breaker article of your applicable tax treaty so you know your fallback if residence is ever contested.

A foreign flip or holding structure only protects you if the company is genuinely managed abroad. Substance, not paperwork, decides POEM, and the cheapest time to fix a weak structure is before an assessment, not during one.

Need help navigating this?

If you run an overseas holding company, or you are planning a flip or a global structure, a short review now can save a painful residence dispute later. Book a call with A S Banka Advisors Private Limited: https://calendly.com/asbanka-info/30min

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