India’s Central Board of Direct Taxes (CBDT) has issued draft guiding principles for determining if a company is a resident in India or has its place of effective management in India.
The Finance Act 2015 amended the provisions of section 6(3) of the Income-tax Act, 1961 to provide that a company is a resident in India in any previous year, if it is an Indian company or its place of effective management for that year is in India. For these purposes, the place of effective management means the place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.
The draft guidelines are primarily based on the fact as to whether or not the company is engaged in ‘active business outside India’. For determination of ‘active business outside India’ factors such as passive income, total asset base, the number of employees, payroll expenses in India and outside, etc. are considered. The draft guidelines also state that the concept of place of effective management is one of substance over form. It further states that the place of effective management in the case of a company engaged in active business outside India shall be presumed to be outside India, if the majority of the meetings of the board of directors of the company are held outside India. The guidelines also deal with the impact of modern technology in the determination of the place of effective management.
