Res­i­dency is where the de­ci­sion-mak­ing lies

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Peter Dachs & Bernard du Plessis

‘Ef­fec­tive man­age­ment’ of an en­tity is key, and so is the def­i­ni­tion of the term

IN DE­TER­MIN­ING whether a com­pany is a “res­i­dent” of SA and there­fore taxed on its world­wide in­come it is nec­es­sary to an­a­lyse the def­i­ni­tion of “res­i­dent” in sec­tion 1 of the In­come Tax Act.

This def­i­ni­tion in essence states that a “res­i­dent” in re­la­tion to a com­pany is “any per­son (other than a nat­u­ral per­son) which is in­cor­po­rated, es­tab­lished or formed in the Repub­lic or which has its place of ef­fec­tive man­age­ment in the Repub­lic, but does not in­clude any per­son who is deemed to be ex­clu­sively a res­i­dent of an­other coun­try for pur­poses of the ap­pli­ca­tion of any agree­ment en­tered into be­tween the gov­ern­ments of the Repub­lic and that other coun­try for the avoid­ance of dou­ble tax­a­tion”.

Ac­cord­ingly, a com­pany will be a “res­i­dent” for South African in­come tax pur­poses if:

It is in­cor­po­rated, es­tab­lished or formed in SA; or

It has its place of ef­fec­tive man­age­ment in SA, un­less such com­pany is deemed to be ex­clu­sively a res­i­dent of an­other coun­try for the pur­poses of the ap­pli­ca­tion of any dou­ble tax­a­tion agree­ment be­tween SA and such other coun­try.

Cer­tain other ex­emp­tions ap­ply to com­pa­nies based in high tax ju­ris­dic­tions and for­eign in­vest­ment en­ti­ties.

The con­cept “place of ef­fec­tive man­age­ment” is not de­fined in the In­come Tax Act, and has not, to date, been an­a­lysed in de­tail by the South African courts.

An in­come tax in­ter­pre­ta­tion note no 6 was is­sued in 2002 by the South African Rev­enue Ser­vice (SARS) re­lat­ing to the con­cept of “ef­fec­tive man­age­ment”. This In­ter­pre­ta­tion Note is not bind­ing in terms of South African law. How­ever, it sets out a gen­eral view of SARS’s in­ter­pre­ta­tion of, in this case, the con­cept of ef­fec­tive man­age­ment. In 2011 a dis­cus­sion pa­per on the in­ter­pre­ta­tion note was re­leased.

The dis­cus­sion pa­per states that in the de­ter­mi­na­tion of where a com­pany is “ef­fec­tively man­aged”:

“The pri­mary em­pha­sis is upon those ‘top’ per­son­nel who ‘call the shots’ and ex­er­cise ‘real­is­tic pos­i­tive man­age­ment’. In gen­eral, th­ese in­di­vid­u­als would be the se­nior of­fi­cers or ex­ec­u­tives who are re­spon­si­ble for: (1) ac­tu­ally de­vel­op­ing or for­mu­lat­ing key op­er­a­tional or com­mer­cial strate­gies and poli­cies for, or tak­ing de­ci­sions on key op­er­a­tional or com­mer­cial ac­tions by the com­pany (re­gard­less of whether those strate­gies, poli­cies and de­ci­sions are sub­ject to for­mal ap­proval by a board or sim­i­lar body) and (2) en­sur­ing that those strate­gies and poli­cies are car­ried out...

“...day-to-day op­er­a­tional de­ci­sion­mak­ing by ju­nior and mid­dle man­age­ment would also gen­er­ally fall out­side of the [rel­e­vant] level of man­age­ment, as would the per­for­mance of rou­tine ad­min­is­tra­tive or sup­port func­tions...”

Although, as stated above, the con­cept of the place of “ef­fec­tive man­age­ment” has not, to date, been an­a­lysed in de­tail by the South African courts, the West­ern Cape High Court ac­knowl­edged in its judg­ment in The Oceanic Trust Co Ltd NO v The Com­mis­sioner for the South African Rev­enue Ser­vice 74 SATC 127, that the place of ef­fec­tive man­age­ment of a per­son other than a nat­u­ral per­son is the place where key man­age­ment and com­mer­cial de­ci­sions that are nec­es­sary for the con­duct of a per­son’s busi­ness are in sub­stance made.

The Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and Devel­op­ment (OECD) has set out a def­i­ni­tion of “place of ef­fec­tive man­age­ment”.

In terms of this def­i­ni­tion, the place of ef­fec­tive man­age­ment is:

“… the place where key man­age­ment and com­mer­cial de­ci­sions that are nec­es­sary for the con­duct of the en­tity’s busi­ness as a whole are in sub­stance made. All rel­e­vant facts and cir­cum­stances must be ex­am­ined to de­ter­mine the place of ef­fec­tive man­age­ment. An en­tity may have more than one place of man­age­ment, but it can have only one place of ef­fec­tive man­age­ment at any one time.”

In terms of the OECD guide­lines, the In­ter­pre­ta­tion Note and Dis­cus­sion Pa­per and the lim­ited case law ref­er­ences, in de­ter­min­ing where a com­pany is ef­fec­tively man­aged it is prin­ci­pally nec­es­sary to have ref­er­ence to the place where:

The im­por­tant man­age­ment de­ci­sions for the com­pany are ac­tu­ally taken (ex­clud­ing share­holder de­ci­sions);

Any day-to-day de­ci­sions by se­nior man­age­ment and direc­tors are taken; and

De­ci­sions are taken which re­late to the devel­op­ment or for­mu­la­tion of key op­er­a­tional or com­mer­cial strate­gies and poli­cies and where im­ple­men­ta­tion of th­ese strate­gies and poli­cies takes place.

Peter Dachs and Bernard du Plessis are direc­tors and joint heads of ENS’s tax de­part­ment.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.