The newest version of the discussion paper on the Direct Tax Code has clarified the
definition of residence for foreign companies in India assuaging fears that companies may be inevitably taxed on their global income.
The paper offers a clearer definition of residency specifying that a foreign company will be considered an Indian resident if the place of effective management or place of central control and management occurs in the country. It defines the place of effective management as the location where key management and commercial decisions that are needed to run the corporation are made.
Specifically, it is the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company.
An earlier version of the DTC loosely defined foreign companies as being either non-resident or residents of the country with residency pertaining to when control and management was wholly or partly done in India.
The earlier definition had unintended consequences. We have now revised the concept of residence to the effective place of management, that is where the board meetings normally take place, a CBDT official told The Economic Times.
The clarification on residency should assure foreign companies that they will not risk being taxed on their international income even if a board meeting is held in the country.