Residential Status of a Company [Section 6(3)]

The residential status of a company is a crucial factor in determining its tax liability in India. Section 6(3) of the Income Tax Act, 1961 (not the Companies Act) governs how a company’s residential status is determined for taxation purposes. This classification affects whether a company is taxed on its global income or only on income earned in India.

Determination of Residential Status for Companies

Under Section 6(3), a company’s residential status is determined as follows:

1. Indian Companies

An Indian company is always considered a resident of India for tax purposes, regardless of where its control and management is situated . This means:

• Even if an Indian company is controlled from outside India
• Even if shareholders controlling more than 51% voting power are non-residents
• The company cannot be non-resident under any circumstances

2. Foreign Companies

For foreign companies, residential status depends on the Place of Effective Management (POEM):

• Turnover ≤ ₹50 crore: Always non-resident in India
• Turnover > ₹50 crore: Considered resident if POEM is in India during the relevant previous year

Place of Effective Management (POEM)

POEM is defined as “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”. Key aspects:

For Companies Engaged in Active Business Outside India

A foreign company is presumed to have POEM outside India if:

1. Passive income ≤ 50% of total income
2. <50% of total assets are in India
3. <50% of employees are in India/residents
4. Payroll expenses for Indian employees <50% of total payroll

Management Power Exercised in India

If the Board doesn’t exercise management powers and these are exercised by:

• Holding company
• Any other person(s) in India

Then POEM is considered to be in India

Two-Stage Determination Process

For other companies, POEM determination involves:

1. Identifying who makes key management/commercial decisions
2. Determining where these decisions are actually made

3.   Tax Implications

Residential status determines tax liability:

• Resident companies: Taxed on global income (Indian + foreign)
• Non-resident companies: Taxed only on:
  • Income received in India
  • Income accruing/arising in India