Foreign Company Tax Residency: What Changes in 2025?
The Income Tax Bill, 2025 redefines how a foreign company can be treated as a tax resident in India. Clause 220 replaces Section 115JH of the 1961 Act, bringing clarity—but also new compliance burdens. Let’s break down the legal shift, implications, and expert view.
What Did Section 115JH Say?
Earlier, under Section 115JH of the Income Tax Act, 1961:
- A foreign company deemed a resident under POEM (Place of Effective Management) was still allowed partial tax reliefs.
- Exemptions were granted via CBDT notifications, limiting the tax impact during transitional periods.
- It was introduced in Finance Act, 2016, but implementation faced practical hurdles, especially in cross-border structuring.
What Does Clause 220 of the Income Tax Bill, 2025 Say?
Under Clause 220, effective AY 2025–26:
- No transitional benefit or CBDT-notified exemptions are provided.
- The scope now extends tax liability on global income, with full reporting under Indian tax law.
Key Differences: Section 115JH vs Clause 220
| Criteria | Section 115JH (1961 Act) | Clause 220 (2025 Bill) |
|---|---|---|
| Basis of residency | POEM | POEM |
| Exemptions via notification | Permitted | Not allowed |
| Transitional provisions | Available | Not included |
| Income taxation scope | Partial (India income focus) | Global income taxable |
| Relief from compliance | Via CBDT notification | No compliance relief |
Legal Implications for Foreign Companies
- Foreign businesses with key decision-making in India now risk full tax residency.
- Global profits may now fall under Indian tax jurisdiction, increasing risk of double taxation.
Expert View: What You Should Do
“Multinational entities must now revisit their board meeting locations, signing authority, and operational headquarters. A misstep in POEM can trigger Indian tax residency—without any grace period.”
Key Takeaways for Businesses
- Revisit corporate structure: Consider having decision-making outside India.
- Start filing Indian tax returns if Clause 220 applies.
- Consult a professional—non-compliance attracts interest and penalty.
FAQs: Foreign Company Tax Residency
Q1. What is POEM?
A: POEM refers to the place where key management and commercial decisions are made.
Q2. Is Clause 220 already in force?
A: It applies from AY 2025–26. Businesses must prepare before March 2025.
Q3. Can I get exemptions like before?
A: No. Clause 220 removes CBDT reliefs that were earlier possible.
Final Note: Don’t Wait for a Notice
The compliance burden is real—but manageable with timely advice.
Clause 220 of the Income Tax Bill, 2025 replaces Section 115JH to redefine foreign company tax residency. If POEM is in India, global income is now taxable under Indian law.