India: “Place of effective management,” determining foreign company’s tax residence

India: Determining foreign company’s tax residence

The Central Board of Direct Taxes issued a draft notification concerning when a foreign company would be determined a resident in India on account of its “place of effective management.”

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Background

Finance Act 2015 amended the tax law provisions dealing with the residential status of a company, and provided that a company would be deemed to be a resident of India for any previous year if it is an Indian company or its “place of effective management” in that year was in India. In the context of implementation of a place of effective management-based residence rule, certain issues have arisen relating to the applicability of current tax law provisions to a company that is incorporated outside India and has not earlier been subject to tax in India.  In particular, the issues relate to applicability of tax law measures for an advance tax payment, for tax withheld at source, for computation of total income, with respect to the rules for offsetting losses, and to how transfer pricing provisions are to be applied. 

Clarification

In order to provide clarity in respect of implementation of the place of effective management-based rule of residence and to address concerns of the stakeholders, the notification provisions are proposed to be effective from Assessment Year 2017-18. The Central Board of Direct Taxes issued a press release and the draft notification providing for exceptions, modifications, and adaptations for application of provisions of the income tax law when a foreign company is said to be a resident in India on account of its place of effective management.

 

Read a June 2017 report [PDF 300 KB] prepared by the KPMG member firm in India

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