Foreign Company Treated as Resident in India (Place of Effective Management): Income Tax Act 2025
Under the Income Tax Act 2025, a foreign company is a resident in India for a tax year if its place of effective management (POEM) is in India in that year (section 6(10)). POEM is the place where the key management and commercial decisions needed to run the company as a whole are, in substance, made. Section 220 then lets the Central Government soften the rules, by notification, for a foreign company that becomes resident for the first time.
This guide explains the residence test, what section 220 does, how the relief can be withdrawn, and what a company or its adviser should check. Every point is taken from the Act as amended by the Finance Act, 2026 (effective 1 April 2026, tax year 2026-27). Last reviewed against that text on 10 November 2026.
When is a foreign company a resident in India?
Section 6(10)(a) says a company is resident in India in a tax year if either of these is true:
- it is an Indian company; or
- its place of effective management is in India in that tax year.
A foreign company is any company that is not a domestic company (section 2(46)). A domestic company is an Indian company, or another company that has made the prescribed arrangements within India for declaring and paying dividends out of its income liable to tax under the Act (section 2(42)). An Indian company is one formed and registered under the Companies Act, 2013 or the other bodies listed in section 2(53), with its registered or principal office in India.
So a company incorporated abroad can still be resident here. Incorporation does not decide it. POEM does.
What does "place of effective management" mean?
Section 6(10)(b) defines it as a place where key management and commercial decisions necessary for the conduct of business of the company as a whole are, in substance, made.
Two words do the work. "As a whole" points to decisions about the company's business overall, not day-to-day operations of one branch. "In substance" means the test looks at where decisions are really taken, not where the board meeting is minuted. The section does not list factors such as where directors live or where meetings are held. Do not assume a checklist the Act does not give.
Note that section 235(1)(h) gives a different, narrower POEM meaning for the shipping tonnage-tax regime only (the place where the board or executive directors make decisions, or, where the board routinely approves their decisions, where the executive directors or officers perform their functions). That wording is for qualifying shipping companies and does not replace the section 6(10)(b) definition for residence.
What is taxed in India once a foreign company is resident?
Residence decides the scope of tax. Under section 5(1), the total income of a resident includes income from whatever source that is received or deemed received in India, accrues or arises (or is deemed to) in India, or accrues or arises outside India. A non-resident is taxed only on income received or deemed received in India, or accruing or arising (or deemed to) in India (section 5(2)). The "not ordinarily resident" carve-out in section 5(1)(c) is tied to section 6(13), which lists individuals, HUFs and certain citizens, so it does not apply to a company.
Residence is tested every tax year (section 6(10)(a): "in any tax year"). A company that is resident for any source of income is deemed resident for all its other sources too (section 6(12)). Treaty relief and foreign tax credit are outside this guide.
What changes when a foreign company becomes resident? Section 220
Being resident can pull a foreign company into rules built for domestic companies. Section 220(1) applies where:
- a foreign company is said to be resident in India in a tax year, and
- it has not been resident in earlier tax years.
In that case, "irrespective of anything in this Act" and subject to conditions notified by the Central Government, these parts of the Act apply with the exceptions, modifications and adaptations specified in the notification for that tax year:
| Area covered by section 220(1) | Clause |
|---|---|
| Computation of total income | (a) |
| Treatment of unabsorbed depreciation | (b) |
| Set off or carry forward and set off of losses | (c) |
| Collection and recovery | (d) |
| Special provisions relating to avoidance of tax | (e) |
Section 220 does not itself grant any relief. It is an enabling provision: the actual exceptions and conditions sit in the Central Government's notification. Every such notification must be laid before each House of Parliament (section 220(4)). The notification text is not part of the Act, so read the notification in force for the tax year before advising a client.
Does the relief continue in later years?
Section 220(2) addresses this. If the determination that the company is resident was made in assessment proceedings for a tax year, section 220(2) extends section 220(1) to the later tax years that end on or before the date the assessment proceeding is completed. In other words, when the Assessing Officer decides residence late, the years that passed in the meantime get the same treatment instead of being left out.
What if the conditions in the notification are not met?
Section 220(3) deals with a company that claimed a benefit, exemption or relief under section 220(1) and later fails to comply with a condition of the notification:
- The benefit, exemption or relief is deemed wrongly allowed (clause (a)).
- The Assessing Officer may recompute the total income for that tax year as if the exceptions, modifications and adaptations did not apply (clause (b)).
- Section 287 (rectification of mistake) applies so far as may be. The four-year period in section 287(8) is counted from the end of the tax year in which the failure takes place (clause (c)).
Worked examples
Example 1: the four-year window. Assumptions: a foreign company is treated as resident for the first time in tax year 2026-27 and claims a notified adaptation. It breaches a notified condition during tax year 2027-28 (1 April 2027 to 31 March 2028).
| Step | Result |
|---|---|
| 1. Tax year of the failure | 2027-28 |
| 2. End of that tax year | 31 March 2028 |
| 3. Add four years (section 287(8) as read with 220(3)(c)) | 31 March 2032 |
| 4. Outcome | The Assessing Officer can recompute the 2026-27 income without the adaptation up to that date |
Example 2: how far section 220(2) reaches. Assumptions: residence of a foreign company is first determined in assessment proceedings for tax year 2026-27, and those proceedings are completed on 20 February 2028. Section 220(2) extends section 220(1) to later tax years that end on or before 20 February 2028. Tax year 2027-28 ends on 31 March 2028, which is after that date, so it is not covered by this extension. If the proceedings instead completed on 10 April 2028, tax year 2027-28 would end before completion and would be covered.
These are illustrations of how the dates are counted. The Act does not give a numeric computation for the relief, because the adaptations are in the notification.
Real-life scenarios
Ravi's holding company. Ravi sets up a holding company abroad, but he and his two co-directors approve every investment, budget and hire from an office in Pune; the foreign board only signs papers. The company's key decisions are, in substance, made in India, so the POEM test in section 6(10)(b) points to India. If this is the first year it is resident, section 220 may apply, subject to the notification.
Meena's trading subsidiary. Meena runs a foreign trading company whose directors meet and decide in Singapore. Her Indian staff only handle logistics. Decisions as a whole are not made in India, so the company is not resident under section 6(10), whatever the size of the Indian activity. The company may still be taxed on income that arises or is deemed to arise in India. That is a separate question from residence.
A company that was already resident. A foreign company was resident in India in earlier tax years, then wound down its Indian management and became resident again. Section 220(1) is worded for a company that "has not been a resident in India in earlier tax years". Whether a returning company can use it is a point to confirm against the notification and the facts.
Common mistakes
- Treating incorporation abroad as the end of the residence question. Section 6(10)(a)(ii) looks at POEM, not at where the company was registered.
- Reading POEM as "where the board meets". The Act says decisions "in substance", so the real decision-maker matters.
- Assuming section 220 gives automatic relief. It only works through a notification and its conditions.
- Ignoring the conditions after claiming relief. A breach lets the Assessing Officer undo the benefit for that tax year (section 220(3)).
- Mixing up the shipping POEM wording with the general one. Section 235(1)(h) is for qualifying shipping companies only.
- Missing the first-year condition. Section 220(1) applies to a company not resident in earlier tax years.
Quick reference
| Question | Answer | Provision |
|---|---|---|
| Test for company residence | Indian company, or POEM in India in that tax year | Section 6(10)(a) |
| POEM means | Where key management and commercial decisions for the company as a whole are in substance made | Section 6(10)(b) |
| Who gets section 220 treatment | Foreign company resident now, not resident in earlier tax years | Section 220(1) |
| What is adapted | Income computation, unabsorbed depreciation, losses, collection and recovery, anti-avoidance provisions | Section 220(1)(a) to (e) |
| Later years | Years ending on or before completion of the assessment that decided residence | Section 220(2) |
| Breach of notified condition | Benefit deemed wrongly allowed, income recomputed, four years from end of year of failure | Section 220(3) |
| Notification | Laid before each House of Parliament | Section 220(4) |
Where this is in the Act
- Section 6(10): residence of a company and the POEM definition
- Section 2(42), 2(46), 2(53): domestic company, foreign company, Indian company
- Section 220: foreign company said to be resident in India
- Section 287(8): four-year limit for rectification, applied by section 220(3)(c)
- Section 235(1)(h): the separate POEM wording for qualifying shipping companies
For individuals, HUFs and other persons, see our guide to residential status in India under the Income Tax Act 2025.
How do CA firms keep track of foreign-company residence cases?
These matters run across several years: a first-year claim, a notified condition to watch, and a limitation date years later. Finexo's practice management software lets a CA firm record such dates against the client and get reminders before they pass. It does not decide residence or draft the filings.
This article explains the Income Tax Act 2025 (as amended by the Finance Act, 2026). It is general information, not tax advice. Confirm the position for a specific company with a qualified chartered accountant.
Frequently Asked Questions
If a foreign company is resident in India, is its foreign income taxable here?
Yes, in principle. Section 5(1) includes income accruing or arising outside India in the total income of a resident, and section 6(12) makes a company resident for one source resident for all sources. A non-resident is taxed only on Indian-source and India-received income (section 5(2)).
When is a foreign company resident in India under the Income Tax Act 2025?
Under section 6(10), a company is resident in India for a tax year if it is an Indian company or its place of effective management is in India in that tax year. A foreign company can therefore be resident through POEM alone.
What is the place of effective management of a company?
Section 6(10)(b) defines it as a place where key management and commercial decisions necessary for the conduct of the business of the company as a whole are, in substance, made.
What does section 220 of the Income Tax Act 2025 do?
It applies when a foreign company is resident in India and was not resident in earlier tax years. The listed provisions then apply with exceptions, modifications and adaptations set out in a notification of the Central Government.
Which provisions can section 220 adapt for a newly resident foreign company?
Computation of total income, unabsorbed depreciation, set off and carry forward of losses, collection and recovery, and special provisions relating to avoidance of tax (section 220(1)(a) to (e)).
What happens if the conditions in the section 220 notification are not followed?
The benefit is deemed wrongly allowed and the Assessing Officer may recompute the total income without the adaptations. Section 287 applies, with the four-year period counted from the end of the tax year of the failure (section 220(3)).
Does the section 220 treatment apply to later tax years?
If residence was determined in assessment proceedings, section 220(2) extends it to later tax years that end on or before the date that assessment proceeding is completed.