Section 220 of the Income-tax Act, 2025 — Foreign Company Said to be Resident in India (POEM)

In plain language

What Section 220 is really about

Section 220 of the Income-tax Act, 2025 deals with a very specific and increasingly common situation: a foreign company that becomes a resident of India even though it is incorporated outside India. This happens because of the Place of Effective Management (POEM) test. Under Indian law, a foreign company is treated as resident in India for a tax year if its POEM — the place where the key management and commercial decisions that are necessary for running the business as a whole are, in substance, made — is located in India during that year.

The problem this section solves is practical. The moment a foreign company is treated as "resident", the entire machinery of Indian tax law suddenly applies to it — how it computes total income, how it claims depreciation, how it carries forward losses, how tax is collected and recovered, and how anti-avoidance rules bite. But that company was never in the Indian system before, so applying every rule literally would create chaos (for example, how do you depreciate an asset the company already owned for years, using Indian rates it never used?). Section 220 gives the Central Government the power to notify exceptions, modifications and adaptations so the transition is workable.

Who it applies to

• Foreign companies (companies incorporated outside India) that are held to be resident in India in a tax year.
• Only where the company was not resident in India in any earlier tax year — i.e. the first year it enters the Indian resident net.
• Typically triggered by POEM being in India, though the section itself works off the "said to be resident" determination.

This is the successor to Section 115JH of the Income-tax Act, 1961. The 2025 Act renumbers and refines the same concept.

The key conditions and how the relief works

• Sub-section (1): In the first year of residency, the Act's provisions on computation of total income, unabsorbed depreciation, set-off/carry-forward of losses, collection and recovery, and anti-avoidance apply subject to conditions notified by the Central Government, with specified exceptions, modifications and adaptations.
• Sub-section (2): Once residency is determined in assessment proceedings for a year, the same treatment also applies to later years that end on or before the date the assessment is completed — so companies caught retrospectively also get the transitional framework.
• Sub-section (3): If a benefit, exemption or relief was allowed under the notification and the company later fails to satisfy a notified condition, the benefit is deemed wrongly allowed. The Assessing Officer can recompute total income as if the modifications never applied, and rectify the assessment (a limited amendment window applies).
• Sub-section (4): Every notification must be laid before Parliament, ensuring legislative oversight.

How it interacts with other provisions

• It builds on the residence test for companies (POEM), so understanding "resident" is a prerequisite.
• It cross-links with depreciation, loss set-off and carry-forward rules, because those are the areas the notification typically modifies.
• For a foreign company, income like dividends, royalty and fees for technical services may still be governed by special foreign-company rate provisions; Section 220 controls the transition, not necessarily the headline rate.
• DTAAs (tax treaties) remain relevant — treaty tie-breaker rules can still decide final residence.

Practical implications

• The most important reference point is the framework earlier operationalised by Notification No. 29/2018 under old Section 115JH, which addressed opening WDV of assets, brought-forward losses and unabsorbed depreciation, and avoiding double relief. Expect a similar notification under the 2025 Act.
• A resident foreign company is taxed on its global income in India, subject to foreign tax credit — a big jump from being taxed only on India-sourced income.
• Companies with Indian promoters, Indian boards or Indian decision-makers running an offshore entity are most at risk of POEM residency, so board minutes, location of decisions, and documentation matter enormously.
• Breaching a notified condition is costly — it can unwind the transitional relief and lead to a full recomputation.