Direct Tax Laws and International Taxation · Assessment of Companies

Classification of Companies and Residential Status under Income-tax Act 2025

Updated 11 October 2026 · Fact-checked

Companies are classified as domestic or foreign, and as closely held or widely held. Residential status is simpler than for individuals. Under section 6(10), a company is resident in India in a tax year if it is an Indian company or its place of effective management is in India in that year. Otherwise it is non-resident.

Understand Classification of Companies and Residential Status

Start with two separate questions. The first is what kind of company it is. The second is where it is resident. Students mix these up and lose marks.

A domestic company is an Indian company, or any other company that has made the prescribed arrangements for declaring and paying dividends in India. A foreign company is a company that is not a domestic company. Whether the company is domestic or foreign decides which tax rate schedule applies. Note: the definitions of these terms sit in the definitions section of the Act, which is not in the extract supplied here. Learn them from your Act and study material.

A closely held company is one in which the public are not substantially interested. A widely held company is one in which they are. This split matters for rules such as those on shares, loans and certain deductions, so state it clearly in answers.

Residential status is a third and separate test. Under section 6(10), a company is resident in India in a tax year if (i) it is an Indian company, or (ii) its place of effective management (POEM) is in India in that year. POEM means 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.

So an Indian company is always resident. A foreign company is resident only if its POEM is in India. A company is never classed as 'not ordinarily resident'. That category applies only to individuals and HUFs under section 6(13). Once a company is resident for any one source of income, section 6(12) treats it as resident for all its other sources in that tax year.

Key rules to remember

Residence of a company: Resident in India = Indian company OR place of effective management in India (in that tax year); Section 6(10)(a). Either condition is enough. Both are tested for the tax year in question.
Place of effective management: POEM = place where key management and commercial decisions for the business as a whole are, in substance, made; Section 6(10)(b). The test is substance, not the place of registration or the place of board meetings alone.
Single residential status for all sources: Resident for any one source ⇒ resident for every other source in that tax year; Section 6(12). A person cannot be resident for some sources and non-resident for others.
Other persons (non-company): HUF, firm, AOP, other persons: resident unless control and management is wholly outside India; Section 6(9) and 6(11). Do not apply this 'wholly outside India' test to a company, which uses section 6(10).
No NOR status for companies: Not ordinarily resident applies to individuals and HUFs only; Section 6(13). A company is either resident or non-resident.
Tax rates on specified foreign company income: Dividend 20%; royalty and fees for technical services (approved agreements) 20%; other income at rates in force; Section 207 applies to non-residents (not being companies) and foreign companies. Dividend from an IFSC unit is 10%. No expense deduction is allowed against these incomes.

How to solve Classification of Companies and Residential Status questions

Use this order for any question on classification or residential status of a company. Keep the classification step separate from the residence step.

1Read the facts and note where the company is incorporated and whether it is an Indian company.
2Classify it as domestic or foreign using the definitions in the Act. This decides which rate schedule applies.
3If asked, classify it as closely held or widely held, based on whether the public are substantially interested.
4Test residence under section 6(10): is it an Indian company? If yes, it is resident and you stop.
5If it is a foreign company, test the place of effective management for that tax year: where are key management and commercial decisions in substance made?
6State the status clearly: resident or non-resident. Do not use 'not ordinarily resident' for a company.
7Apply section 6(12): if resident for one source, it is resident for every source in that tax year.
8Link to tax: for a non-resident or foreign company, note which income is taxable in India and whether section 207 rates apply. Give a clear conclusion.

Quickest way: Two-question shortcut

When to use it: Use in MCQs and in the first line of a descriptive answer, when you have under two minutes.

Ask: Is it an Indian company? If yes, resident. Done.
If no, ask: where are key decisions in substance made, in India during the tax year? If yes, resident; if no, non-resident.
Check the options for the words 'not ordinarily resident' next to a company. Reject them.
Remember that incorporation abroad alone does not make a company non-resident if POEM is in India.

Common mistakes in Classification of Companies and Residential Status

Saying a foreign company is non-resident without testing POEM.
Students equate 'foreign' with 'non-resident'.
Fix: Treat classification and residence as two tests. A foreign company is resident if its place of effective management is in India in that tax year.
Calling a company 'resident but not ordinarily resident'.
The ROR/NOR/NR pattern learnt for individuals is applied to every person.
Fix: Under section 6(13), NOR status is for individuals and HUFs. A company is only resident or non-resident.
Applying the 'control and management wholly outside India' test to a company.
This test is in section 6(9) and 6(11), which sit close to the company rule.
Fix: Use section 6(10) for companies: Indian company, or POEM in India.
Defining POEM by the place of registration or where board meetings are held.
Students want a simple physical test.
Fix: Quote the definition: where key management and commercial decisions for the business as a whole are, in substance, made. Look at who actually takes the decisions.
Treating residence as fixed for all years.
Students forget that status is decided each tax year.
Fix: Test the company afresh for each tax year. POEM can be in India in one year and outside in the next.
Mixing closely held and widely held with domestic and foreign.
All four terms appear in the same chapter.
Fix: Keep two separate grids: domestic/foreign (rates) and closely held/widely held (public interest). Residence is a third grid.

Worked examples

Example 1

Zenith Holdings Ltd is incorporated in Singapore. In the tax year 2026-27, its board meets in Singapore, but its Managing Director and the CFO, who take all key commercial and strategic decisions for the group, operate from Mumbai. Determine its residential status in India for the tax year 2026-27.

Show the solution

Zenith is incorporated outside India, so it is not an Indian company. Section 6(10)(a)(i) is not satisfied.
Test section 6(10)(a)(ii): is its place of effective management in India in that tax year?
POEM is the place where key management and commercial decisions for the business as a whole are, in substance, made (section 6(10)(b)).
The key decisions are in substance made by the MD and CFO in Mumbai. Board meetings in Singapore do not change this, since substance governs.
So POEM is in India and the company is resident in India for 2026-27.
By section 6(12), it is resident for all sources of income in that year, including foreign income.

Answer: Zenith Holdings Ltd is resident in India for the tax year 2026-27, because its place of effective management is in India.

Example 2

Kaveri Textiles Pvt Ltd is an Indian company. All its directors and decision makers live in Dubai, and all board meetings are held there. A student says it is not resident in India and may be treated as 'not ordinarily resident'. Evaluate the statement.

Show the solution

Kaveri is an Indian company, so section 6(10)(a)(i) is satisfied.
Under that clause, an Indian company is resident whether or not its POEM is in India. The POEM question does not arise.
So the claim that it is non-resident is wrong.
The claim of 'not ordinarily resident' is also wrong. Section 6(13) gives that status only to individuals and HUFs, not companies.
Under section 6(12), being resident, it is resident for all its sources of income.

Answer: The statement is incorrect. Kaveri Textiles Pvt Ltd is resident in India for the tax year, as it is an Indian company, and the NOR category does not apply to companies.

Exam tips

Write the section 6(10) test in one line at the start of any company residence answer. It earns marks for the rule itself.
In case-based MCQs, look for the words 'Indian company'. If present, the answer is resident regardless of where the directors sit.
For POEM questions, quote the 'in substance' wording and tie it to a fact in the case, such as who signs key contracts.
Show the domestic/foreign classification separately when the question also asks about the rate of tax, and link foreign companies to section 207 where income is dividend, royalty or fees for technical services.
Check the tax year in the question. Status is decided for each tax year, so say 'for the tax year 2026-27', not 'always'.

Practice questions from Assessment of Companies

Classification of Companies and Residential Status in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Classification of Companies and Residential Status: frequently asked questions

What is the residential status of a company under the Income-tax Act, 2025?

Under section 6(10), a company is resident in India in a tax year if it is an Indian company or its place of effective management is in India in that year. Otherwise it is non-resident. There is no 'not ordinarily resident' category for companies.

What is place of effective management?

It is the place where key management and commercial decisions necessary for the conduct of the business of the company as a whole are, in substance, made. The test looks at where decisions are really taken, not only where meetings are held or the company is registered.

Can a foreign company be resident in India?

Yes. A foreign company is resident in India for a tax year if its place of effective management is in India in that year. If its POEM is outside India, it is a non-resident.

What is the difference between closely held and widely held companies?

A widely held company is one in which the public are substantially interested. A closely held company is one in which they are not. The distinction is about public shareholding, and it is separate from whether the company is domestic or foreign.

Does a domestic company have to be resident?

An Indian company is always resident under section 6(10)(a)(i). Other domestic companies are tested under the definitions in the Act, so check whether the company in the question is an Indian company before applying the rule.