30 January, 2018
Place of Effective Management Clarification on India based Regional Headquarters
The concept of Place of Effective Management (‘POEM’) for deciding tax residency status of a company other than an Indian company was introduced in the Income-tax Act, 1961 (‘ITA’) with effect from April 1, 2017. The guidelines for determination of POEM of a company were issued on January 24, 2017. Subsequently, based on the guidelines issued, concerns regarding applicability of POEM were raised in case of multinational companies with regional headquarter structure wherein certain employees having multi-country responsibility or oversight over the operations in other countries of the region are working from India.
The clarification issued by the Central Board of Direct Taxes (‘CBDT’), pursuant to Circular No. 25/2017 dated October 23, 2017, has reiterated the principle laid down in the POEM guidelines (issued in January, 2017) that mere compliance with parent’s global policies for the group as a whole but not specific to any particular company would not affect POEM determination. Applying this principle, the CBDT has now clarified that so long as the India based regional headquarter operates for the group companies / subsidiaries in a region on the basis of the parent’s global policies for the group, not being specific to any particular entity or group of entities, such activities of the India based regional headquarters alone will not trigger POEM risk.
However, it has been specifically recognized in the circular that if this clarification is used for aggressive/ abusive tax planning, then GAAR may get triggered.
Relief for PE Funds from Indirect Transfer Provisions to Avoid Double Taxation
The ITA provides for levy of capital gains tax on indirect transfer of Indian capital assets (‘Indirect Transfer Provisions’), whereby gains arising to a shareholder on a transfer or redemption of shares of an offshore entity could be taxable in India if such offshore entity derives its value, directly or indirectly, substantially from assets located in India. Pursuant to an amendment by the Finance Act, 2017, investments held by a non-resident, directly or indirectly, in FPIs registered as Category I or Category II under the SEBI (Foreign Portfolio Investor) Regulations, 2014 have been exempted from the purview of Indirect Transfer Provisions.
Now, as a relief to private equity funds set up as multi-tier investment structures, the CBDT has issued Circular No.28/2017 dated November 7, 2017 and clarified that Indirect Transfer Provisions will not apply to the income of a non-resident on account of redemption or transfer of its share or interest held in an upstream offshore entity which has, in turn, invested in an Indian fund, being Category I or Category II Alternative Investment Fund or Venture Capital Fund or Venture Capital Company (the ‘Specified Fund ’), if:
i. such income accrues or arises from or in consequence of transfer of shares or securities held in India by such Specified Fund;
ii. such income is taxable in India; and
iii. the redemption proceeds do not exceed the pro-rate share of the non-resident investor in the total consideration realized by the Specified Fund from the said transfer of shares or securities in India.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
