Types, Definitions, And Residential Status of Companies Under the Income Tax Act, 1961

Here’s a structured breakdown of the types, definitions, and residential status of companies under the Income Tax Act, 1961:

1. Types of Companies

1. Based on Incorporation
2. Indian Company[Section 2(26)]:
   • Incorporated under Indian laws (e.g., Companies Act 2013).
   • Always treated as a resident in India, regardless of management location.
3. Foreign Company[Section 2(23A)]:
   • Incorporated outside India.
   • Taxed as a resident in Indiaonly if its Place of Effective Management (POEM) is in India.

1. Based on Public Interest

1. Company in which Public is Substantially Interested[Section 2(18)]:
   • Government-owned, listed entities, or companies with >40% shares held by government/RBI.
   • Includes Section 25 companies (non-profit).
2. Closely Held Company:
   • Public not substantially interested (e.g., private companies).

1. Special Categories

• Domestic Company[Section 2(22A)]: Indian companies or foreign companies declaring dividends in India.
• Investment Company: Primarily earns income from property, capital gains, or other sources.

2. Definition of Company [Section 2(17)]:

A “company” means:

1. Any Indian company,
2. Any body corporate incorporated by or under the laws of a country outside India,
3. Any institution, association, or body:

• • Assessed as a company under the Indian Income-tax Act, 1922, or
  • Assessed as a company under the current Act for any year up to 1 April 1970,

4. Any institution, association, or body, whether incorporated or not, Indian or foreign, declared by the CBDT (Central Board of Direct Taxes) as a company by general or special order.

3. Residential Status of Companies [Section 6(3)]

The residential status of a company determines its tax liability in India. Under Section 6(3), a company is classified as either a resident or non-resident based on two key criteria:

1. Place of Incorporation
2. Place of Effective Management (PoEM).

1. Resident Company

A company is considered a resident in India if it satisfies either of the following conditions:

(A)  Indian Company

• Definition: Incorporated under Indian laws (e.g., Companies Act, 2013).
• Tax Status: Always treated as a resident, irrespective of where its management is located.
  Example: A company registered in Mumbai but managed from Singapore is still a resident in India.

(B)  Foreign Company with PoEM in India

• PoEM Definition: The place where key management and commercial decisionsare made for the company.
• Test for PoEM:
  • Active Business Outside India: If >50% of income/assets/employees are outside India, PoEM is presumed outside India.
  • Board Meetings: Majority of strategic decisions made in India → PoEM in India.
    Example: A UK-based company holding 8 out of 12 board meetings in India → PoEM in India → Taxable as a resident.

Exceptions:

• Foreign companies with turnover ≤ ₹50 crore(₹500 million) are exempt from PoEM scrutiny.

2. Non-Resident Company

A company is a non-resident if:

• It is not an Indian company, and
• Its PoEM is outside India.
  Example: A US company with all board meetings and operations in the USA → Non-resident in India.

3. Tax Implications

Example:

• A German company with PoEM in Berlin earns ₹10 crore from India → Taxable only on ₹10 crore (non-resident).
• The same company shifts PoEM to Mumbai → Entire global income becomes taxable in India.

4. Key Concepts

Place of Effective Management (PoEM)

• Guidelines: Circular No. 6/2017 clarifies PoEM rules.
• Substance Over Form: Actual decision-making matters, not just formal headquarters.

Permanent Establishment (PE)

• Non-resident companies may also be taxed if they have a fixed place of business(e.g., branch, factory) or a dependent agent in India.

5. Recent Updates (Finance Act 2025)

• Simplified Tax Year: Aligns “assessment year” with the financial year.
• Clarification on PoEM: Active business tests refined for foreign companies