How a foreign company becomes an Indian resident
A company's tax residence is not just about where it is registered. Under Section 6, a foreign company is resident in India for a year if its place of effective management is in India that year, and a resident company is taxed on its worldwide income. Place of effective management, usually shortened to POEM, is defined as the place where the key management and commercial decisions necessary for the conduct of the business as a whole are, in substance, made. The emphasis is on substance: not where the paperwork says the company is based, but where the real decisions actually get taken.
For an NRI this is the live risk. If you own a company incorporated in a low-tax jurisdiction but you sit in India and it is from India that you make the genuine strategic and commercial decisions, the company can be treated as having its place of effective management in India, and so become an Indian tax resident exposed to Indian tax on its global profits. It is a substance test, so simply keeping a foreign registered office or a nominal local director does not settle the question if the real control is in India.
The two things that protect most companies
The rule is softened considerably by tax-authority guidelines, and there are two protections worth knowing. The first is the active-business-outside-India test. A company that genuinely runs its business abroad is presumed to have its management outside India, and it qualifies if its passive income is low and the majority of its income, its assets, its employees and its payroll are outside India, and the majority of its board meetings are held outside India. Meet that, and POEM is presumed to be abroad, though the tax officer can still look behind it if the real decisions are being made in India.
The second protection matters most for a smaller business: the guidelines do not apply at all to a company whose turnover or gross receipts are ₹50 crore or less in a financial year. So a typical small NRI-owned foreign company, well under that figure, is outside the POEM net regardless of where its decisions are made. The point at which to worry is a larger company, above that threshold, whose real management sits in India. These thresholds and tests come from tax-authority guidance rather than the bare section, so their exact application is worth checking, and it is sensible to keep board meetings and real decision-making documented and abroad where the company is meant to be foreign. A practising CA assesses whether your company is at POEM risk and helps structure its management so a genuinely foreign company stays foreign for tax.