New Delhi :  Targeting shell companies, the government on Tuesday issued new tax rules requiring foreign firms to pay taxes in India if the effective control of business, management decisions and majority of board meetings take place within the country.

 The long awaited Place of Effective Management (POEM) rules, to be effective from the current fiscal (April 2016), will not apply to companies having a turnover or gross receipts of Rs 50 crore or less in a financial year.

 The rules require foreign companies in India and Indian firms with overseas subsidiaries to pay local taxes based on where the business if effectively controlled, reports PTI.

 “The intent is to target shell companies and companies which are created for retaining income outside India although real control and management of affairs is located in India,” CBDT said. The rules require company’s residency to be determined by persons exercising effective control over decision making and the place where such control is exercised from, according to the guidelines issued by CBDT on Tuesday. This would help target shell companies, or holding companies, incorporated overseas to evade taxes by showing their residency as a tax haven even though the management and effective decision making takes place in India.

 “The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM it is the substance which would be conclusive rather than the form,” the CBDT said.

 As per the Guiding Principles, “place of effective management” is defined as a 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.

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