By CA Surekha Ahuja
Where the percentage matters, where it does not, and why new and cross-border companies need a different test
10%, 45%, 49%, 50% or 51% — ownership is a number. Control is a legal conclusion. POEM is a factual conclusion. Withholding is a payment-level obligation. Disclosure is a separate compliance question.
That distinction becomes critical when a new company is incorporated, ownership crosses borders, management remains in India, or group entities begin transacting with each other.
The percentage starts the analysis. It does not finish it.
The 5-Layer Control Test
SHAREHOLDING
↓
RIGHTS
Voting | Board | Contract | Management
↓
CONTROL
Who has the relevant power?
↓
SUBSTANCE
Where are decisions actually made?
↓
TRANSACTIONS
Equity | Loan | Guarantee | Services | IP | Goods
↓
LAW
Companies Act | Ind AS | FEMA | Tax | TP
↓
TAX + WITHHOLDING + DISCLOSURE
↓
DO ALL RECORDS TELL THE SAME STORY?One commercial fact can therefore produce several different legal consequences.
Where the Percentage Matters — and Where It Does Not
| Percentage / fact | May matter for | Does not automatically mean |
|---|---|---|
| 51%+ | Majority ownership / specified statutory tests | POEM or every form of control |
| 50% | Voting/economic position | Sole control |
| 49% | Minority ownership | No control |
| 10%+ listed foreign entity | Specific FEMA/ODI test | Universal control |
| <10% + control | FEMA/ODI analysis | “Too small to matter” |
| Any % + contractual rights | Potential control | Automatic control |
| 100% foreign ownership | Complete ownership | Management outside India |
Professional rule
Never ask only “What percentage?” Ask “Percentage for which law, for which purpose, and subject to what conditions?”
The 49% Trap
Indian Company → 45% → Singapore Company
The remaining shares are widely dispersed, but the Indian company has significant Board or contractual rights.
“Only 45%, therefore no control” may be an unsafe conclusion.
Under Ind AS 110, control is determined by power over relevant activities, exposure to variable returns and the ability to use that power to affect returns.
FEMA has its own definition of control.
Therefore: 49% is not a safe harbour from control.
The 10% FEMA Trap
Under the FEMA overseas investment framework, 10% or more in a listed foreign entity is relevant to ODI classification, while a below-10% investment with control can also fall within the ODI framework.
Therefore: 9% + no control ≠ 9% + control
And the FEMA analysis does not end at classification. Financial commitment, reporting, disinvestment and continuing compliance may follow.
Caution “Below 10%” is not a blanket FEMA exemption. Always identify the statutory condition attached to the threshold.
The POEM Trap: When Percentage Becomes Secondary
A foreign company may be 100% owned outside India, yet:
Strategy → India
Budget → India
Financing → India
Key management → India
The question may then become: Where is its Place of Effective Management?
But: Control ≠ POEM
45% does not automatically create POEM.
51% does not automatically create POEM.
100% ownership does not itself prove POEM.
Incorporation tells you where the company was formed. POEM asks where effective management occurs.
Then the Border Is Crossed by the Transaction
Once the group enters into: Loans | Guarantees | Management Fees | Technical Services | Royalty | IP | Cost Sharing | Goods
separate questions arise:
| Question | Test |
|---|---|
| Taxability | Is the income chargeable? |
| Withholding | Does tax have to be deducted from the payment? |
| Transfer Pricing | Is the international transaction at arm's length? |
| FEMA | Is the investment/payment/financial commitment permitted and reported? |
| Disclosure | What must appear in accounts, returns or regulatory filings? |
These are not interchangeable.
No POEM does not mean no withholding.
Consolidation does not mean no transfer pricing.
Taxability does not mean withholding.
One disclosure does not replace another statutory reporting requirement.
The New Company Trap
The control question should be settled when the structure is created, not after the first notice.
A typical structure: Promoter → Indian HoldCo → Foreign HoldCo → Operating Company
followed by: Equity → Debt → Guarantee → Services → IP → Royalty
creates a chain of legal questions.
If management is also operating across borders, the risk multiplies.
Professional insight
Document the control analysis at inception. Do not reconstruct it five years later from Board minutes, emails and tax returns.
One Fact. Multiple Consequences.
| Fact | Primary review |
|---|---|
| 51% in new company | Ownership + statutory/control analysis |
| 49% + strong rights | Control |
| 9% listed foreign investment + control | FEMA/ODI |
| 45% foreign holding + India-based decisions | Control + POEM |
| Parent loan/guarantee | FEMA + tax + TP |
| Cross-border management fee | Taxability + withholding + TP + FEMA |
| Intra-group transaction eliminated in CFS | TP/tax analysis still required |
| Different relationship in different filings | Immediate reconciliation |
The Real Default Risk
WRONG PERCENTAGE ASSUMPTION
↓
WRONG CONTROL CONCLUSION
↓
WRONG ACCOUNTING / FEMA / TAX ANALYSIS
↓
MISSED WITHHOLDING / TP / REPORTING
↓
INCONSISTENT DISCLOSURES
↓
INTEREST / PENALTY / REGULATORY ACTION /
LITIGATION / REWORKNot every case produces every consequence.
But one wrong conclusion at inception can travel through the entire compliance chain.
The Red Flags
| 🔴 Trigger | Stop and review |
|---|---|
| <50% + substantial rights | Control |
| <10% foreign listed investment + control | FEMA/ODI |
| Foreign company substantially managed from India | POEM |
| Parent funding / guaranteeing foreign entity | FEMA + tax + TP |
| Cross-border group charges | Tax + withholding + TP |
| CFS and FEMA show different relationships | Reconcile immediately |
| Board minutes and tax filings identify different decision-makers | Substance / POEM |
| No documented control assessment | Audit + disclosure risk |
The “Stop Before Signing” Test
Before approving a new company, overseas investment, restructuring or cross-border transaction, ask:
1. Ownership — What percentage do we own?
2. Rights — What rights come with it?
3. Control — Who can direct the relevant activities?
4. Substance — Where are important decisions made?
5. Transaction — What crosses the border?
6. Tax — Is there taxability or withholding?
7. Pricing — Is TP applicable?
8. FEMA — Is the investment/payment/financial commitment permitted and reported?
9. Disclosure — Are all statutory disclosures aligned?
10. Evidence — Can we prove the conclusion years later?
If the answer to the last question is “No” — stop before signing.
The Real Turning Point
The conventional question is: “Is it 51%?”
The professional questions are:
Why does 51% matter here?
Would 49% change the answer?
Would different rights change it?
Would management from India change it?
Would a cross-border payment change it?
Would withholding apply even if POEM does not?
Would TP apply even if the transaction disappears on consolidation?
Would the disclosure position differ?
That is the real analysis.
The Bottom Line
51% may matter for ownership and specified statutory tests.
49% may still involve control.
10% may matter under FEMA in specified circumstances.
Below 10% does not necessarily end the FEMA analysis.
100% ownership does not determine POEM.
Control does not automatically determine tax residence.
Taxability does not equal withholding.
Consolidation does not eliminate transfer pricing.
One disclosure does not replace another statutory reporting obligation.
And for a new or cross-border group, the real question is not: “How much do we own?”
It is: “What do our rights legally give us, what do we actually do, where do we do it, what crosses the border, what must be taxed or withheld, what must be reported, and can we prove the entire position later?”
**The percentage tells you what you own.
The rights tell you what you can control.
The facts tell you what you actually do.
The transaction tells you where the risk travels.
The statute determines what follows.**
