South Africa Guides On Corporate Residency
The South African Revenue Service (SARS) has issued a revised draft interpretation note that discusses the principles and guidelines for the considering the “place of effective management” in determining the tax residence of a company.
SARS points out that the concept of residency is critical in determining a company’s South African tax obligations. In general, a resident is liable to income tax on gross income derived within and outside the country, while a non-resident is only liable to income tax on gross income from a source within it.
Generally, a taxpayer other than a natural person is a “resident” if it is incorporated, established or formed in South Africa, or has its place of effective management therein. However, that definition excludes any taxpayer that is deemed to be exclusively a resident of another country for purposes of the application of any tax treaty, while special considerations also apply to a “foreign investment holding company” as defined in the tax code.
It is noted that the term “place of effective management” is not defined in the South African tax code and must be ascribed its ordinary meaning, taking into account international precedent and interpretation. SARS emphasizes, nevertheless, that “it does not have a universally accepted meaning and various countries, including members of the OECD, continue to attach different meanings to it.”
It concludes that a company’s place of effective management is the place where key management and commercial decisions that are necessary for the conduct
of its business as a whole are in substance made. This approach is consistent with the OECD’s commentary on the term.
While “a company may have more than one place of management, it can only have one place of effective management at any one time,” it adds. “There are normally multiple facts that need to be taken into account, often involving multiple locations, and from those facts and locations it is therefore necessary to determine a single dominant place where effective management is located.”
SARS suggests that definitive rules cannot be laid down in determining the place of effective management and all relevant facts and circumstances must be examined on a case-by-case basis. “The place of effective management test is one of substance over form,” it continues. “It therefore requires a determination of those persons in a company who actually ‘call the shots’ and exercise ‘realistic positive management.'”
It stresses that “the place of effective management must be supported by the facts. A company bears the onus of proof on the issue of place of effective management and should retain the necessary evidence to support the view taken.”
