POEM and CbC reporting for Indian-founded global structures

An Indian founder who incorporates a Delaware parent for the US market often assumes the Delaware entity is foreign for Indian tax purposes. Section 6(3) of the Income-tax Act and the CBDT's POEM framework say something different.

The default position, after the 2015 amendment that introduced POEM and the 2017 CBDT circular that operationalised it: a company incorporated outside India is treated as resident in India if its place of effective management in that year is in India. Resident status triggers global income taxation under Section 5.

The work of staying non-resident is structural — board composition, decision-making location, treasury, contracts. Two years into our advisory work with Indian-founded SaaS groups, the patterns of where they fail are consistent.

What POEM actually tests

Section 6(3)(ii) defines POEM as the place where key management and commercial decisions necessary for the conduct of the business of an entity as a whole are, in substance, made.

CBDT Circular 06/2017 sets out the operational framework. The starting test: Active Business Outside India (ABOI). A company has ABOI if:

passive income is not more than 50% of total income;

less than 50% of total assets are situated in India;

less than 50% of total employees are situated in India or are resident in India;

payroll expenses on such employees is less than 50% of its total payroll.

Where ABOI is satisfied, POEM is presumed to be outside India unless the majority of board meetings are held in India.

Where ABOI is not satisfied, a two-stage substantive test applies: (a) identify the persons who actually make the key management and commercial decisions, and (b) determine where those decisions are in fact made.

Where Indian-founded SaaS groups fail

Five patterns recur.

Founders run the company from India. The Delaware parent has two Indian-founder directors who live in Bangalore. The board meetings are held by video conference, but the founders dial in from India. The day-to-day decisions — pricing, hiring senior US sales staff, signing customer contracts — are taken by the founders during their working day in India. The non-Indian directors, if any, are passive.

On a substantive POEM test, the answer is unambiguous. The persons who make the key decisions are the founders; they make those decisions in India. POEM in India.

Asset and employee concentration in India. 80% of headcount in Bangalore, 80% of fixed assets in India. ABOI test fails immediately. The presumption is gone; the substantive test applies; absent strong contrary evidence, POEM follows the head count.

Board meetings in India. Even where ABOI is satisfied, if the majority of board meetings are held in India, the presumption flips. Board meetings 'held in India' includes meetings where the chairperson and a majority of directors physically participate from India, regardless of where the meeting is formally convened.

Treasury and banking in India. The Delaware parent's principal operating bank account is in Mumbai. Treasury decisions — moving cash between subsidiaries, approving capex over a threshold, choosing FX hedging counterparties — are made by an India-based CFO. The CBDT framework treats treasury as a key management function. India-based treasury management is strong evidence of POEM in India.

Contract negotiation and signing in India. US customer contracts negotiated by India-based sales heads, signed by India-resident officers under POA. Even if the contracting entity is Delaware, the negotiation and execution location matters.

What structurally works

We have advised Indian-founded global groups to put the following in place where they want the parent to be non-resident in India.

First, board composition with a foreign majority. At least 50% of the board, including the chair, resident in the parent's jurisdiction (US/Singapore/UAE depending on structure). The independent or non-executive directors should have genuine substance — they meet, they review, they vote.

Second, board meetings outside India. Quarterly board meetings in the parent's jurisdiction, with founders flying in. The exception (one or two meetings by video with founders dialling in from India) is fine; the rule (every meeting from India) is not.

Third, senior management outside India. A CEO or COO based in the parent's jurisdiction with genuine decision-making authority. Not a figurehead. They should sign the customer contracts, approve hires above a threshold, hold the bank signatory authority.

Fourth, treasury offshore. Operating accounts, working-capital decisions, FX hedging executed from the parent's jurisdiction. The Indian subsidiary's treasury is for the Indian subsidiary only.

Fifth, documented decision trails. Board minutes that show the senior decisions were taken in board meetings, not by executive fiat. Key decisions (annual budget, major hires, fundraising, M&A) referenced to specific board resolutions taken in specific overseas meetings.

Cost of this structure: a senior overseas hire (USD 200k-400k), board members compensation (typically equity-heavy), travel costs for founder visits. Justifiable for a group at Series B onwards or for a structure with material non-India revenue.

CbC reporting under Section 286

Country-by-Country reporting applies to multinational groups whose consolidated revenue exceeds €750 million (approximately ₹6,800 crore). Section 286 of the Income-tax Act read with Rule 10DB.

For most founder-owned Indian-headed global groups, the threshold is not yet hit. Razorpay, Zepto, OYO at peak, Postman are in the small set that has crossed or come close.

The mechanics, when applicable: Form 3CEAD filed by the parent (if Indian-headquartered) or by the constituent entity in India (if non-Indian-headquartered group). Filing deadline: 12 months after the end of the reporting accounting year. Contents: revenue, profit before tax, income tax paid, accrued, stated capital, accumulated earnings, employee count and tangible assets — broken down country-by-country.

Penalty for non-filing: ₹5,000 per day for the first 30 days, ₹15,000 per day thereafter, capped at ₹5 lakh under Section 271GB.

The Master File (Form 3CEAA) and CbC are distinct compliances with different thresholds. Master File: group revenue >₹500 crore AND Indian-entity related-party transactions >₹50 crore (or >₹10 crore for intangibles). CbC: group revenue >€750 million.

What we do at engagement

For Indian-founded groups Series A onwards: a POEM analysis run at incorporation of the foreign parent and refreshed annually. The analysis covers board composition, meeting locations, decision-making substance, treasury, contracts and headcount. Output: a 5-page memo with an explicit risk rating (low/medium/high) and a list of structural changes needed.

POEM is the silent residency question for Indian-founded global groups. Most groups discover the problem when they raise their Series C and the diligence team asks 'has the parent ever been examined for Indian residency'. The honest answer in too many cases: 'we have not run the test'.

Run the test. Refresh it annually. Build the substance before the tax exposure becomes a deal-blocker.