Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed against CBDT Circulars 6, 8 and 25 of 2017 and the residence provisions
Introduction
A permanent establishment makes some of your income taxable in India. Place of effective management makes all of it taxable in India.
Having a permanent establishment means that income related to the permanent establishment is taxable in India. Having a place of effective management in India means that the worldwide income of the foreign company is taxable in India.
That is the whole reason this analysis matters more than the one foreign groups usually run. A PE dispute is about attribution — how much profit belongs to the Indian activity. A POEM finding is about identity: the foreign company is treated as an Indian tax resident, and its global profits come into the Indian net.
The exposure has grown quietly for a specific reason. More multinationals now run genuine regional and global functions from India — capability centres that have moved from back-office to decision-making, senior executives based in Bengaluru or Gurugram with real authority, boards that meet by video with Indian-resident directors participating.
Each of those developments is commercially sensible. Together they describe the fact pattern POEM was written to catch.
And the test that most often fails is not the one groups expect. It is the payroll test — and it fails because the Indian executives are senior and well paid.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. POEM is the largest unaddressed Indian tax exposure for groups whose India operation has grown from a cost centre into a decision centre.
Where a rule is settled we state it with the circular. Where the test is inherently judgmental — and beyond the objective thresholds it is — we say so, because the honest answer for many groups is a documented position rather than a certainty.
Primary source: the Income Tax Department for the residence provisions and CBDT Circular No. 6 of 2017 dated 24 January 2017, Circular No. 8 of 2017 and Circular No. 25 of 2017.
1. The provision
A company is said to be a resident in India in any previous year if it is an Indian company, or its place of effective management in that year is in India — where “place of effective management” means 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.
POEM determines corporate residence by locating where key management and commercial decisions for the business as a whole are, in substance, made.
Note the two qualifiers doing the work: as a whole, and in substance.
“As a whole” means decisions about the entire business, not about the Indian part of it. A senior manager in India running the Indian operation is not making decisions for the business as a whole; the same person running the group’s global product function may be.
“In substance” means the analysis follows where decisions are actually taken, not where they are formally recorded. A board that meets abroad to ratify decisions already made in India has not moved the POEM.
1.1 A note on section references
The provision sits at Section 6(3) of the Income-tax Act, 1961. The Income-tax Act, 2025 recodified the statute with substantial renumbering, so confirm the current section reference for your assessment year rather than relying on a citation in any article, including this one.
2. The ₹50 crore gate
The first question is whether the provision applies at all.
Circular No. 8 of 2017 clarifies that the POEM limb shall not apply to companies having turnover or gross receipts of ₹50 crore or less in a financial year.
POEM rules apply only if the foreign company’s gross turnover exceeds ₹50 crore in the financial year.
2.1 Which company’s turnover
The threshold applies to the foreign company whose residence is in question, not to the Indian subsidiary and not to the group.
This matters for structure. A group may have a large Indian operation and a small overseas holding entity, and the POEM question for that holding entity is tested against its own turnover.
2.2 It is a gate, not a safe harbour to design around
Turnover fluctuates. A company below the threshold in one year and above it in the next has a POEM question in the second year, and the analysis is annual.
Since the residential status of any entity is to be determined every year, POEM is also required to be determined yearly.
A group whose overseas entity is approaching ₹50 crore should run the analysis before crossing it, not after.
3. POEM is not PE, and the difference is the point
| Permanent establishment | Place of effective management | |
|---|---|---|
| What it establishes | A taxable presence | Tax residence |
| What becomes taxable | Income attributable to the PE | Worldwide income |
| The dispute is about | Attribution — how much | Status — whether the company is Indian |
| Treaty position | PE article | Residence article and tie-breaker |
| Triggered by | Fixed place, agency, service presence | Where key decisions for the whole business are made |
It is pertinent to note that having a permanent establishment of a foreign company in India is different from having a place of effective management in India. A foreign company having a permanent establishment in India does not mean that the company’s management occurs in India.
3.1 They are independent
A company can have a PE without POEM, POEM without a PE, both, or neither. Clearing the PE analysis says nothing about POEM.
Groups that have done careful PE work — day-count registers, agency analysis, secondment structuring — sometimes assume the residence question is covered. It is not, and it is the larger exposure of the two. See permanent establishment risk in India.
4. The Active Business Outside India test
The analysis proceeds in a defined order, and the first stage is objective.
CBDT guidance prescribes a fact-specific, annual, substance-over-form test: first assess Active Business Outside India via four objective metrics averaged over three years.
A foreign company shall be said to be engaged in ABOI if all conditions are cumulatively satisfied.
| # | Test | Condition |
|---|---|---|
| 1 | Passive income | 50% or less of total income |
| 2 | Assets | Less than 50% of total assets situated in India |
| 3 | Employees | Less than 50% of employees situated in or resident in India |
| 4 | Payroll | Less than 50% of total payroll expenditure incurred on those employees |
All four, cumulatively. Failing any one means the company is not engaged in active business outside India, and the analysis moves to the harder stage.
4.1 What counts as passive income
Passive income is the aggregate of income received through transactions where both the purchase and sale of goods is from or to associated enterprises, and any income earned by way of royalty, dividend, capital gains, interest or rental income.
Two consequences for group structures.
An intermediate holding company is exposed. An entity whose income is largely dividends and interest from group companies is likely to fail the passive income test on its face.
A group trading company can be too. Where both the buying and selling legs are with associated enterprises, that income is passive for this purpose — regardless of how much commercial activity sits behind it.
4.2 Employees includes people who are not employees
This widens the third test considerably.
The guidelines clarify that employees to be considered shall include persons who, though not employed directly by the company, perform tasks similar to those performed by the employees. There may be divergent views on whether a contractual employee, representative agent or professional employer organisation is intended to be covered.
So a group that keeps headcount off the foreign company’s own payroll — contractors, an employer of record, secondees on another entity’s books — may not have moved the number it thought it was moving.
5. The payroll test: the one that fails
This is the counterintuitive result, and it is the single most useful thing in this guide.
The employee test counts heads. The payroll test counts money. A company can pass the third and fail the fourth, and that is exactly what happens when the Indian people are senior.
5.1 The worked example
Consider a company with 100 employees, of whom 45 are Indian residents and 55 are located abroad, but whose CEO and Managing Director are Indian residents. Total payroll is ₹5 crore, of which ₹3 crore relates to employees located in India and ₹2 crore to employees located abroad.
Even though more than 50% of the assets and employees are located outside India, more than 50% of the payroll expenditure pertains to employees located in India. Therefore the company does not have an active business outside India, and its place of effective management is in India. The company is a resident of India and its global income is taxable in India.
5.2 Why this catches modern group structures
Read that fact pattern against how multinationals actually staff India now.
The historical India operation was large headcount at low cost — which passed the payroll test comfortably even when it failed the employee test. The current pattern is different: fewer people, far more senior, running global functions.
A group with a small number of highly paid Indian executives — a global CTO, a regional CEO, a head of product — can have most of its headcount and assets abroad and still fail the payroll test.
The test penalises seniority. Which means it bites hardest on precisely the groups that have moved real decision-making authority to India, which is the behaviour it was designed to detect.
5.3 Run the number
This is a calculation, not a judgment. Take total payroll expenditure of the foreign company, identify the portion relating to people situated in or resident in India including those performing similar tasks without being directly employed, and compute the percentage.
Groups that have never run it are usually surprised by the answer.
6. If ABOI is satisfied: board meetings
If ABOI exists, a majority of board meetings abroad tends to indicate POEM outside India, unless de facto control is exercised from India.
In case a company has an active business outside India, its POEM is assumed to be outside India if the majority of meetings of its board of directors are held outside India.
6.1 The worked position
Where all directors are residents in India and five board meetings are held during the year — two in India, two in Country X and one in Country Y — and the company is engaged in ABOI, then since a majority of meetings, being three out of five, are held outside India, the POEM would be presumed to be outside India.
Note what that example establishes: even where every director is Indian resident, ABOI plus a majority of meetings abroad produces a presumption that POEM is outside India.
That is a meaningful protection, and it is why the ABOI stage matters so much.
6.2 The condition on the presumption
The presumption fails where de facto control is exercised from India.
If board decisions are overridden from India, POEM is in India.
So a board that meets abroad but is directed from India has not achieved anything. The location of the meeting is evidence of where decisions are made; it is not a substitute for decisions being made there.
7. If ABOI is not satisfied: the two-stage test
Where ABOI is not established, determination of POEM involves a two-stage process: identifying the person or persons who actually make the key management and commercial decisions for the company as a whole, and determining the place where these decisions are made.
If not ABOI, identify who makes key decisions and where they are made, using primary and secondary factors.
7.1 This stage is judgmental
Since the language used in the guidelines is open to interpretation, there could be litigation with the Indian tax authorities on this issue.
Even after the establishment of guiding principles, POEM is a very subjective matter based on the facts and circumstances of each case, as these principles are only guiding in nature.
Which is why the objective ABOI stage is where a group should try to win. Once the analysis reaches the second stage, it becomes a factual argument about who decides what, conducted years later on documents.
7.2 What the documents need to show
If your group will land in stage two, the evidence has to exist contemporaneously:
- Board minutes recording substantive deliberation, not ratification
- Delegations of authority showing what is decided at what level and by whom
- Location records for directors and senior decision-makers
- Evidence that the people named as decision-makers actually engaged with the matters
Minutes that record a decision without any deliberation are the worst possible evidence, because they suggest the deliberation happened somewhere else.
8. Video conferencing
This is the modern complication and it deserves its own treatment, because the old advice — hold the meetings abroad — assumed the directors travelled.
Appointment of an Indian director on the board of a foreign company, and participation of a director residing in India in a meeting via telephone or video facility, would be susceptible to the applicability of POEM in India.
A board meeting “held in Singapore” where three of five directors dial in from India is a different fact from a board meeting held in Singapore with the directors present.
8.1 The practical position
There is no rule that video participation defeats the location of a meeting. But the analysis is substance-based, and a pattern of Indian-resident directors participating remotely in meetings nominally held abroad invites the argument that the decisions were made in India.
For a group relying on the ABOI-plus-majority-abroad presumption, physical attendance is materially better evidence than dial-in attendance. That is a real cost, and it should be weighed against the exposure rather than dismissed.
9. Danger signals for foreign groups
| Signal | Why it matters |
|---|---|
| Senior global executives based in India | Payroll test, and stage-two decision-making |
| Indian residents on the foreign company’s board | Expressly identified as raising POEM susceptibility |
| Board meetings by video with Indian participants | Weakens the location evidence |
| Regional or global functions run from India | Decisions for the business “as a whole” |
| An overseas entity whose income is group dividends, interest or royalty | Fails the passive income test |
| A trading entity buying and selling only within the group | That income is passive for ABOI purposes |
| Contractors and EOR staff in India | Counted in the employee test despite not being employees |
| Decisions taken in India and ratified abroad | Substance defeats the formality |
9.1 The capability centre trajectory
Worth naming directly, because it is where the risk has moved.
A group sets up an Indian centre to do delivery work. Over five years it takes on more responsibility, hires more senior people, and eventually the person running a global function sits in India. Nobody made a decision to move the company’s management; it happened incrementally through good hiring.
The POEM analysis is annual and substance-based, so it picks up the position as it is, not as it was intended.
Groups on that trajectory should run the analysis when they promote, not when they file.
10. The procedural safeguards
These matter and they are frequently unknown.
The Assessing Officer, before initiating any proceedings for holding a company resident under POEM, requires the approval of the Principal Commissioner or Commissioner. Further, before giving any such finding, the Assessing Officer requires approval from a collegium consisting of three members, being the Principal Commissioner or Commissioner of the region concerned.
10.1 What this tells you
Two things.
POEM is not raised casually. A single assessing officer cannot make a POEM finding on their own initiative. The two-level approval requirement means a case that reaches you has been through senior review.
The collegium is an opportunity. Because the finding requires collegium approval, the taxpayer’s representations are made to a body considering the question specifically, rather than to an officer working through a general assessment.
A group facing a POEM enquiry should treat the collegium stage as the substantive hearing it is.
11. What happens if POEM is in India
The foreign company is a resident, and its worldwide income is taxable in India.
Administrative approvals and transition rules govern tax computation, depreciation, loss carryovers, accounting periods and TDS.
This has been clarified by CBDT Circular No. 25 of 2017 dated 23 October 2017.
| Consequence | Detail |
|---|---|
| Scope of taxation | Worldwide income, not just Indian-source |
| Return filing | Indian return covering global income |
| Withholding | The company becomes subject to Indian TDS obligations as a resident |
| Computation | Transition rules for depreciation, brought-forward losses and accounting periods |
| Foreign tax credit | Available for taxes paid abroad, subject to conditions |
| Treaty | The company is resident in two states — the treaty tie-breaker applies |
11.1 The treaty tie-breaker
Most tax treaties entered into by India recognise the concept of place of effective management for determination of residence of a company as a tie-breaker rule for avoidance of double taxation.
Where a company is resident in India under domestic law and in another state under that state’s law, the treaty decides. Many Indian treaties use POEM as the tie-breaker, which means the same concept resolves the conflict it created — and the answer under the treaty need not match the answer under domestic law.
Note also that some modern treaties replace the automatic POEM tie-breaker with a competent authority determination, which turns a legal question into a negotiation between two tax administrations. Check the specific treaty.
12. Two situations, worked through
Scenario A — The holding company that failed on income
A group holds its Asian subsidiaries through an intermediate company in a low-tax jurisdiction. That company has three directors, two of whom are Indian residents, and its income consists of dividends from subsidiaries and interest on intra-group loans. Turnover exceeds ₹50 crore.
The ABOI analysis. Passive income is effectively 100% of total income — dividends and interest are passive by definition. The first test fails immediately, so ABOI is not established regardless of the asset, employee and payroll positions.
What follows. The two-stage test: who makes the key decisions for this company, and where. With two of three directors resident in India and no substantive activity anywhere else, that is a difficult argument.
What would have helped. Substance in the holding jurisdiction — genuine decision-makers, genuine deliberation, documented. Or accepting the position and structuring around it rather than hoping.
Scenario B — The group that failed on payroll
A European group’s foreign operating company has 100 employees, 55 abroad and 45 in India. Assets are predominantly outside India. On heads and assets it passes comfortably.
What it missed. The India-based team includes the global CTO, the head of product and two other senior leaders. Indian payroll is 60% of total payroll expenditure.
The result. The fourth test fails. ABOI is not established, and the analysis moves to who makes key decisions and where — with the group’s most senior functional leaders sitting in India.
The irony. The group did nothing evasive. It hired excellent people in India and gave them real jobs. The test reads that as management moving to India, because in substance it did.
13. Twelve mistakes
- Assuming PE work covers POEM. They are independent, and POEM brings worldwide income into charge.
- Never running the payroll test, which is the one that fails for groups with senior Indian staff.
- Reading the employee test as headcount only and forgetting the payroll test counts money.
- Excluding contractors and EOR staff from the employee count, when persons performing similar tasks are included.
- Assuming an intermediate holding company is safe. Dividends and interest are passive income and fail the first test.
- Treating intra-group trading income as active. Where both legs are with associated enterprises, it is passive for ABOI.
- Relying on a majority of meetings abroad without ABOI. The presumption only operates where ABOI is established.
- Holding meetings abroad while Indian directors dial in, which weakens the very evidence the meeting was held to create.
- Minutes that record decisions without deliberation, suggesting the deliberation happened elsewhere.
- Ratifying abroad what was decided in India. The test is substance.
- Running the analysis at filing rather than at the point of a senior India appointment.
- Treating the ₹50 crore gate as permanent when turnover fluctuates and the test is annual.
14. Checklist
Threshold
- Turnover or gross receipts of the foreign company established for the year
- Where approaching ₹50 crore, analysis run before the threshold is crossed
- Analysis diarised annually, since residence is determined each year
ABOI — run all four
- Passive income computed: intra-group purchase-and-sale income, royalty, dividend, capital gains, interest, rental — against 50% of total income
- Assets situated in India as a proportion of total assets
- Employees situated in or resident in India, including contractors, agents and EOR staff performing similar tasks
- Payroll expenditure on those people as a proportion of total payroll — computed, not assumed
- Averaged over the relevant period per the guidance
- All four confirmed as cumulatively satisfied, or the failure identified
If ABOI is satisfied
- Majority of board meetings held outside India, with dates and locations recorded
- Physical attendance preferred over video for directors resident in India
- Minutes recording substantive deliberation at the meeting
- No pattern of decisions being taken in India and ratified abroad
If ABOI is not satisfied
- Key management and commercial decisions for the business as a whole identified
- Decision-makers identified by name and location
- Delegation of authority documented, showing what is decided at what level
- Contemporaneous evidence assembled — the position will be argued years later on documents
- Treaty tie-breaker analysed for the relevant jurisdiction
- Advance ruling considered where the amounts justify it — see advance ruling under the Income Tax Act
Is your India operation making decisions, or executing them?
That question decides POEM, and most groups have never asked it in this form — because the shift from execution to decision-making happens through hiring rather than through any decision. Tell us where your senior people sit and what your overseas entity’s payroll looks like and we will run the four ABOI tests and tell you which one you are closest to failing.
15. Frequently asked questions
Q1. What is place of effective management?
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. A foreign company whose POEM is in India is a resident of India for tax purposes, which brings its worldwide income into the Indian tax net.
Q2. How is POEM different from a permanent establishment?
A PE makes income attributable to the Indian presence taxable in India. POEM makes the foreign company an Indian tax resident, so its worldwide income becomes taxable in India. A company can have a PE without POEM, POEM without a PE, both or neither — clearing the PE analysis says nothing about residence.
Q3. Does POEM apply to every foreign company?
No. CBDT Circular No. 8 of 2017 clarified that the POEM limb does not apply to companies with turnover or gross receipts of ₹50 crore or less in a financial year. The threshold is tested against the foreign company whose residence is in question, not against the Indian subsidiary or the group.
Q4. Is the ₹50 crore threshold a permanent exemption?
No. Turnover fluctuates and residential status is determined every year, so a company below the threshold in one year and above it in the next has a POEM question in the second year. Groups approaching the threshold should run the analysis before crossing it.
Q5. What is the Active Business Outside India test?
The objective first stage, with four conditions that must all be satisfied cumulatively: passive income of 50% or less of total income; less than 50% of assets situated in India; less than 50% of employees situated in or resident in India; and less than 50% of total payroll expenditure incurred on those employees.
Q6. What counts as passive income for the ABOI test?
Income received through transactions where both the purchase and sale of goods is from or to associated enterprises, plus income by way of royalty, dividend, capital gains, interest or rental income. This is why intermediate holding companies and intra-group trading entities frequently fail the first test.
Q7. Which ABOI test do foreign groups most often fail?
The payroll test, and it is counterintuitive. The employee test counts heads; the payroll test counts money. A group with most of its people and assets abroad can still fail if its India-based staff are senior and well paid — because the test effectively penalises seniority.
Q8. Can you give an example of the payroll test failing?
A company with 100 employees, 45 Indian resident and 55 abroad, but whose CEO and Managing Director are Indian residents. Total payroll ₹5 crore, of which ₹3 crore relates to Indian employees. Despite most assets and employees being outside India, the payroll test fails, ABOI is not established, and POEM is in India.
Q9. Who counts as an employee for the ABOI test?
More people than are on the payroll. The guidelines clarify that employees include persons who, though not employed directly by the company, perform tasks similar to those performed by employees. Contractors, representative agents and employer-of-record arrangements may therefore be counted.
Q10. What happens if ABOI is satisfied?
POEM is presumed to be outside India if a majority of board meetings are held outside India, unless de facto control is exercised from India. This presumption operates even where all the directors are Indian residents, which is why establishing ABOI matters so much.
Q11. Can board meetings held abroad be overridden?
Yes. The presumption fails where de facto control is exercised from India — if board decisions are overridden from India, POEM is in India. The location of a meeting is evidence of where decisions are made; it is not a substitute for decisions actually being made there.
Q12. What happens if ABOI is not satisfied?
A two-stage process: identifying the person or persons who actually make the key management and commercial decisions for the company as a whole, and determining the place where those decisions are made, using primary and secondary factors. This stage is judgmental and litigation-prone.
Q13. Does video participation by Indian directors create POEM risk?
It creates evidential risk. Appointing an Indian resident director on a foreign company’s board, and participation by a director residing in India via telephone or video, are expressly identified as raising POEM susceptibility. A meeting nominally held abroad with most directors dialling in from India is weaker evidence than physical attendance.
Q14. Do Indian-resident directors by themselves create POEM?
Not by themselves. The worked example in the guidance shows a company with all directors resident in India, engaged in ABOI, with three of five meetings abroad — and POEM is presumed to be outside India. Indian directors raise the question; they do not determine the answer.
Q15. Why is an intermediate holding company particularly exposed?
Because its income is typically dividends from subsidiaries and interest on intra-group loans, both of which are passive income. That fails the first ABOI test immediately, regardless of the asset, employee and payroll positions, and pushes the analysis straight into the judgmental second stage.
Q16. What are the procedural safeguards before a POEM finding?
Two levels of approval. The Assessing Officer requires approval of the Principal Commissioner or Commissioner before initiating proceedings, and before giving a finding requires approval from a collegium of three members being Principal Commissioners or Commissioners of the region. POEM is not raised casually.
Q17. What happens if POEM is held to be in India?
The foreign company is a resident and its worldwide income becomes taxable in India, with an Indian return covering global income and Indian withholding obligations as a resident. CBDT Circular No. 25 of 2017 addresses transition rules for tax computation, depreciation, loss carryovers, accounting periods and TDS.
Q18. Does a tax treaty help?
It can. Where a company is resident in India under domestic law and in another state under that state’s law, the treaty tie-breaker decides. Most Indian treaties use place of effective management as the tie-breaker, though some modern treaties replace it with a competent authority determination, which turns the question into a negotiation between administrations.
Q19. Is POEM determined once or every year?
Every year. Residential status is determined annually, so POEM must be assessed each year on that year’s facts. A group whose India position is changing should run the analysis when it changes, not when it files.
Q20. How does a capability centre become a POEM risk?
Incrementally. A centre set up for delivery work takes on more responsibility over several years, hires more senior people, and eventually someone running a global function sits in India. No decision was taken to move the company’s management, but the annual substance-based test picks up the position as it is.
Q21. What documentation should a group maintain?
Board minutes recording substantive deliberation rather than ratification, delegations of authority showing what is decided at what level and by whom, location records for directors and senior decision-makers, and evidence that named decision-makers actually engaged with the matters. Minutes recording a decision with no deliberation suggest it happened elsewhere.
Q22. Can we get certainty on our POEM position?
An advance ruling is available for a question of law or fact on tax liability, and residence is capable of being framed as one — but it must be sought before any notice issues, and an adverse ruling binds the applicant. It suits a group with a strong position wanting confirmation, not one exploring an uncertain one.
Related reading
- Permanent establishment risk in India — the other residence-adjacent exposure, and how it differs
- Advance ruling under the Income Tax Act — obtaining certainty before a notice
- Transfer pricing for Indian subsidiaries — the intra-group flows that also feed the passive income test
- Best business structures in India for foreign companies — where holding structures sit
Talk to us before the next senior India hire
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. POEM analysis and the four ABOI tests, board governance and meeting protocols, permanent establishment assessment, treaty tie-breaker analysis and advance rulings — run together, because the same facts drive all of them.
How we usually start. Tell us your overseas entity’s turnover, where its assets and people sit, what its income consists of, and where your senior decision-makers are based. We come back with the four ABOI tests computed, which one you are closest to failing, and what the board protocol should look like from here.