Company Residential Status: Essential factor in filing Company


Company Residential Status: Essential factor in filing Company

Setting up a business in India is becoming easy, as the government is focusing more on promoting ease of business in the nation. But simply setting up is not enough, you must also be well aware of tax laws and standards in India. In the process, there are several key laws and rules defined under the Company Act, and the Income Tax Act are to be followed. Hence, it is recommended that you trust a professional in the process. You can partner with leading Accounting Outsourcing Companies in Mumbai, to ensure accurate tax filings in real time. 

While planning for tax filing for your company, a factor that is considered is the residential status of your company. In the case of a company there can be three conditions:

  • The company is registered and operated in India, hence is a resident.
  • The company’s place of effective management (POEM) is in India, hence will be considered resident. 
  • A foreign company whose management and major business part (>50%) is located outside India, will be considered as Non-Resident. 

Based on such a classification of the company’s residential status, further, the tax slabs are defined. Hence, partnering with CA firms can help you identify your company’s residential status and further eliminate any filing inaccuracy.

Further in the process, a common confusion that exists is how POEM is defined. Before moving forward, you must be clear, that such a concept is only applicable to foreign companies operating in India. It can be a company that has its registered office located outside India, but still operating in India. In case your company is registered under The Company Act, 2013 then by default you are an Indian company and will be liable to pay tax as a resident.

Key factors defining POEM for a company 

  • If the management-related activities are being conducted outside India, its POEM will be considered to be outside India. Such can include board of directors meetings or any major operational meetings. 
  • Also, if the majority of business operations are located outside India, in such a case, its POEM will be considered to be outside India. 
  • The majority of business operations reflect that if the company has more than 50% of its assets, employees, or payroll expenses outside India. 
  • Also, if its passive income (If any is generated in India) is less than 50% of its total income it will be considered to have POEM outside India. The passive income includes the income from property rentals, dividends, interest, or capital gains.

Based on the above factors, if the company has POEM in India, they will be treated as Indian residents and accordingly, the tax rates will be applicable.

End Notes

The information provided may sound you to be complex if you are not well aware of Indian tax laws and regulations. But simply neglecting such laws can have an impact on your business positioning and stability in the Indian marketplace. Hence, it is a wise decision to outsource your accounting to a leading accounting service provider or a CA firm in Mumbai.

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