POEM in 2026: When Is Your Foreign Company Tax-Resident in India? Section 6(3) to Section 6(10) of the Income-tax Act 2025

Set up a company in Dubai or Singapore, run it from a laptop in Bengaluru, and you may have created an Indian tax resident without meaning to. The concept that decides this is Place of Effective Management, or POEM. It is the test that determines when a foreign company becomes tax-resident in India and is taxed here on its worldwide income. With the Income-tax Act, 2025 in force from 1 April 2026, the residence rule has moved from Section 6(3) of the old Act to Section 6(10) of the new one, and this is the moment for every founder with an overseas entity to check where their company is really managed from. This guide explains the place of effective management test in 2026, who it catches, and what to do about it.

Quick Summary: Key Takeaways

• A company is resident in India if it is an Indian company, or if its Place of Effective Management is in India in that year.
• POEM means the place where key management and commercial decisions necessary for the conduct of business of the company as a whole are, in substance, made. The definition is identical in both the old and the new Act.
• Period-aware citation: apply Section 6(3) of the Income-tax Act, 1961 for FY 2025-26 and earlier; apply Section 6(10) of the Income-tax Act, 2025 for FY 2026-27 onward.
• CBDT Circular 6/2017 gives the Active Business Outside India (ABOI) test, and CBDT Circular 8/2017 keeps companies with turnover of Rs 50 crore or less in a year outside the POEM guidelines.
• If your foreign company is run from India, it can be taxed in India on its global income, not just its India-sourced income.

What is Place of Effective Management?

POEM is a residence test for companies. India taxes a resident on its worldwide income and a non-resident only on income that arises in or is received in India. For an individual, residence turns on days of physical presence. For a company, the law uses two tests: incorporation and effective management. A company incorporated in India is always resident. A company incorporated abroad becomes resident in India in a year if its effective management, in substance, sits in India during that year.

The statutory definition, read from the Income Tax Department’s own text of Section 6(10)(b) of the Income-tax Act, 2025, is precise: place of effective management “means a place where key management and commercial decisions necessary for the conduct of business of the company as a whole are, in substance, made.” The two words that decide cases are “key” and “in substance.” It is not about where routine operations happen or where a paper board meets. It is about where the real, strategic decisions are actually taken.

When is a foreign company tax-resident in India?

The residence rule is period-aware because the governing statute changed on 1 April 2026. The test itself did not change; only the section number and the Act did.

Financial year	Governing provision	Company resident in India if
FY 2025-26 and earlier (AY 2026-27 and earlier)	Section 6(3), Income-tax Act, 1961	It is an Indian company, or its POEM in that year is in India
FY 2026-27 onward	Section 6(10)(a) and (b), Income-tax Act, 2025	It is an Indian company, or its place of effective management is in India in that tax year

So the substantive question a founder must answer is the same for both periods: where is my foreign company actually managed from? What changes at the citation level is that from FY 2026-27 you refer to Section 6(10) of the Act 2025, not Section 6(3) of the Act 1961.

The Active Business Outside India (ABOI) test

To keep genuine operating businesses out of the POEM net, CBDT Circular No. 6/2017 dated 24 January 2017 built a safe harbour called the Active Business Outside India test. A company is treated as having active business outside India, broadly, where its passive income is not more than 50% of its total income and less than 50% of its total assets are situated in India, together with further tests on the proportion of its employees and payroll in India. Passive income here means income such as royalties, dividends, interest, capital gains and income from related-party transactions.

For a company that clears the ABOI test, POEM is presumed to be outside India if the majority of its board meetings are held outside India, unless the board is standing aside and the real authority is being exercised by a holding company or a person in India. For a company that does not clear the ABOI test, the determination looks at where key management and commercial decisions are actually made, judged on substance over the year.

The Rs 50 crore turnover relief

Recognising that POEM analysis is heavy, CBDT Circular No. 8/2017 dated 23 February 2017 clarified that the POEM guidelines do not apply to a company with turnover or gross receipts of Rs 50 crore or less in a financial year. For most early-stage startups and small overseas holding companies, this relief means the detailed POEM guideline analysis will not bite. It does not, however, switch off the statutory residence test itself, and it is a per-company threshold measured on that company’s own turnover.

Both circulars were issued under the 1961 Act. Because the Act 2025 carries the POEM definition forward unchanged, this guidance continues to inform POEM determination, but it is prudent to confirm whether CBDT re-issues or updates the ABOI test and the Rs 50 crore relief under the new Act before you rely on them for FY 2026-27 and later.

What POEM residence actually costs you

If your foreign company is held to have its POEM in India, it is a resident. A resident company is taxed in India on its worldwide income, must comply with Indian corporate tax filing, and comes within the transfer pricing and withholding regime. Foreign tax credit rules and the tie-breaker article of the relevant tax treaty then become critical to avoid double taxation. This is not a theoretical risk for founders who incorporate a holding company abroad for fundraising or IP, and then run every real decision from India over video calls.

Action checklist: keeping management where it belongs

1. Map where your foreign company’s key decisions are actually made, not where the registered office or the accountant sits.
2. Hold real board meetings in the company’s home jurisdiction, with directors who genuinely participate, and keep minutes that show the decisions were taken there.
3. Appoint at least one director who is genuinely resident and active in that jurisdiction, with real authority.
4. Keep local bank signatories and financial approvals in the home jurisdiction.
5. Document major decisions, and maintain a decision log or board pack that stands up to a POEM enquiry.
6. Test yourself against the ABOI factors and the Rs 50 crore threshold, and take a position in writing.
7. Check the tie-breaker article of the applicable tax treaty so you know your fallback if residence is contested.

What this means for founders, CAs and cross-border groups

Founders: a foreign flip or holding structure only protects you if the company is genuinely managed abroad. Substance, not paperwork, decides POEM. CAs and advisers: the Act 2025 renumbering is a good prompt to revisit residence positions taken under the old Section 6(3) and confirm the file supports them. Cross-border groups and family offices: POEM sits alongside your FEMA and transfer pricing exposure, and the cheapest time to fix a weak structure is before an assessment, not during one.

Frequently Asked Questions

Does POEM apply to my small overseas holding company?

The detailed POEM guidelines do not apply to a company with turnover or gross receipts of Rs 50 crore or less in a financial year, per CBDT Circular 8/2017. The statutory residence test still exists, but for most small companies the guideline analysis will not be triggered.

Has POEM changed under the Income-tax Act, 2025?

The definition has not changed. The provision has moved from Section 6(3) of the 1961 Act to Section 6(10)(a) and (b) of the Income-tax Act, 2025, in force from 1 April 2026. Cite the 1961 section for FY 2025-26 and earlier, and the 2025 section for FY 2026-27 onward.

If my company is resident in India by POEM, what is taxed?

A resident company is taxed in India on its worldwide income, subject to foreign tax credit and any relief under the applicable tax treaty. It also comes within Indian corporate filing, transfer pricing and withholding obligations.

Do board meetings held abroad automatically move POEM outside India?

No. If the board only formally approves decisions that are in substance taken by a person or holding company in India, the location of the meetings will not save you. POEM looks at where the real authority is exercised.

How is POEM different from an individual’s residence test?

An individual’s residence depends on days of physical presence in India. A company’s residence depends on incorporation and on where its effective management is located. They are separate tests with separate thresholds.

Related reading on TaxUpdate.in

• GIFT City IFSC Tax Rules in 2026
• CBDT FAQ Deep-Dive #9: Inter-Corporate Dividends Under the Income-tax Act 2025
• FEMA (Authorised Persons) Regulations 2026

Get expert guidance

A foreign holding company is only as safe as its substance. If you run an overseas entity and want to know whether it is exposed to Indian residence by POEM, or you want to strengthen the structure before an assessment, Tax Update India can help. Schedule a strategy session to review your cross-border structure. Our work is reviewed by experienced cross-border professionals.

Sources

Section 6(10)(a) and (b), Income-tax Act, 2025, read verbatim from the Income Tax Department at incometaxindia.gov.in/w/section-6-253, retrieved 11 September 2026 (Act 2025, in force 1 April 2026). Section 6(3), Income-tax Act, 1961, for FY 2025-26 and earlier. CBDT Circular No. 6/2017 dated 24 January 2017 (guiding principles and the ABOI test) and CBDT Circular No. 8/2017 dated 23 February 2017 (Rs 50 crore turnover threshold), incometaxindia.gov.in, corroborated 11 September 2026.

Disclaimer

This article is for general information and does not constitute tax or legal advice. It is period-aware: apply the Income-tax Act, 1961 for FY 2025-26 and earlier, and the Income-tax Act, 2025 for FY 2026-27 onward. The ABOI test and the Rs 50 crore relief are drawn from CBDT circulars issued under the 1961 Act; confirm their continued application under the Act 2025 before relying on them. Seek professional advice for your specific facts and treaty position.