De­ter­min­ing res­i­dency for tax agree­ment

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

No sig­nif­i­cant change to res­i­dent ar­ti­cle of new Mau­ri­tian treaty

THE Mau­ri­tian/South African dou­ble tax agree­ment which en­tered into force in 1997 has been rene­go­ti­ated. There are three main amend­ments to the 1997 dou­ble tax agree­ment. Firstly the res­i­dent ar­ti­cle has been amended. Se­condly, the al­lo­ca­tion of tax­ing rights in re­la­tion to im­mov­able prop­erty as­sets has been rene­go­ti­ated. Thirdly, the in­ter­est ar­ti­cle has been amended.

In terms of the 1997 dou­ble tax agree­ment it is nec­es­sary to de­ter­mine whether a com­pany is res­i­dent in Mau­ri­tius or SA.

Where a com­pany is con­sid­ered to be both a res­i­dent of Mau­ri­tius in terms of Mau­ri­tian do­mes­tic tax law and a res­i­dent of SA in terms of South African do­mes­tic tax law it is nec­es­sary to have ref­er­ence to the tie-breaker test set out in ar­ti­cle 4(3) of the 1997 dou­ble tax agree­ment.

This tie-breaker pro­vi­sion states that where a com­pany is a res­i­dent of both Mau­ri­tius and SA then it shall be deemed to be a res­i­dent of the state in which its place of ef­fec­tive man­age­ment is sit­u­ated.

In this re­gard, there has been some sug­ges­tion that, in ap­ply­ing this tie-breaker test it is nec­es­sary to have ref­er­ence to the OECD Com­men­tary.

In terms of the com­men­tary the true de­ci­sion-mak­ers of a com­pany must be iden­ti­fied, who may or may not be mem­bers of the board, and the place where such per­son(s) make the key man­age­ment de­ci­sions (as op­posed to the place where de­ci­sions are merely for­mally re­solved) should con­sti­tute the place of ef­fec­tive man­age­ment of the com­pany.

How­ever it is not clear that, in ap­ply­ing the tie-breaker test, the OECD Com­men­tary would be fol­lowed. In­stead SA could ar­guably ap­ply its do­mes­tic tax law in de­ter­min­ing whether a com­pany has its “place of ef­fec­tive man­age­ment” in SA or Mau­ri­tius.

In this re­gard, SARS’s in­ter­pre­ta­tion of “place of ef­fec­tive man­age­ment” em­pha­sises the place where im­por­tant de­ci­sions are im­ple­mented as well as the place where cer­tain day-to-day man­age­ment func­tions are car­ried out. It also looks at the place where 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.

If, af­ter ap­ply­ing the tie-breaker test, it is still not clear whether a com­pany is “ef­fec­tively man­aged” in SA or Mau­ri­tius, the par­ties may then re­sort to the mu­tual agree­ment pro­ce­dure set out in the 1997 dou­ble tax agree­ment.

Ar­ti­cle 4 of the rene­go­ti­ated dou­ble tax agree­ment states that “a com­pany will con­sti­tute a res­i­dent of a Con­tract­ing State if it is li­able to tax therein by rea­son of its domi­cile, res­i­dence, place of man­age­ment or any other cri­te­rion of a sim­i­lar na­ture”.

This means that, as in the case of the 1997 dou­ble tax agree­ment, both SA and Mau­ri­tius must de­ter­mine whether a com­pany is res­i­dent of Mau­ri­tius/SA by ap­ply­ing their re­spec­tive do­mes­tic tax law con­cepts.

In re­spect of a Mau­ri­tian in­cor­po­rated com­pany, Mau­ri­tius will there­fore ap­ply its place of in­cor­po­ra­tion or cen­tral man­age­ment and con­trol test in or­der to de­ter­mine whether that en­tity is tax res­i­dent in Mau­ri­tius as a mat­ter of Mau­ri­tian do­mes­tic tax law.

SA will ap­ply its con­cept of “ef­fec­tive man­age­ment” in de­ter­min­ing whether as a mat­ter of South African do­mes­tic tax law the com­pany is tax res­i­dent in SA.

Ar­ti­cle 4 of the rene­go­ti­ated dou­ble tax agree­ment, how­ever, does not have a tie-breaker test. In­stead in cases of dual res­i­dence in re­spect of a com­pany the com­pe­tent au­thor­i­ties of Mau­ri­tius and SA must by mu­tual agree­ment set­tle this is­sue and de­ter­mine in which ju­ris­dic­tion the com­pany is res­i­dent.

This repli­cates the po­si­tion un­der the 1997 dou­ble tax agree­ment on the ba­sis that, when ap­ply­ing the tiebreaker test set out in the 1997 dou­ble tax agree­ment, South Africa may ap­ply its do­mes­tic law con­cept of place of ef­fec­tive man­age­ment.

It there­fore seems that the ab­sence of a tie-breaker test in the rene­go­ti­ated dou­ble tax agree­ment may not make a sig­nif­i­cant dif­fer­ence in the de­ter­mi­na­tion of the tax res­i­dence of a com­pany.

In re­spect of both the 1997 dou­ble tax agree­ment and the rene­go­ti­ated dou­ble tax agree­ment it should be en­sured that the “ef­fec­tive man­age­ment” of a com­pany (as un­der­stood un­der South African tax law) is not based in SA.

Ar­ti­cle 13 of the re-ne­go­ti­ated dou­ble tax agree­ment which deals with cap­i­tal gains has in­serted a pro­vi­sion that states as fol­lows:

“Gains de­rived by a res­i­dent of a Con­tract­ing State from the alien­ation of shares de­riv­ing more than 50% of their value di­rectly or in­di­rectly from im­mov­able prop­erty sit­u­ated in the other Con­tract­ing State may be taxed in that other State.”

Where a Mau­ri­tian com­pany holds shares in a South African com­pany and the South African com­pany holds im­mov­able prop­erty then a sale of the shares in the South African com­pany by the Mau­ri­tian com­pany may be taxed in SA.

How­ever, a dou­ble tax agree­ment may not im­pose ad­di­tional tax li­a­bil­i­ties to those which ex­ist un­der do­mes­tic tax law. There­fore the cap­i­tal gain will be tax­able only if it falls within the pro­vi­sions of para­graph 2 of the Eighth Sched­ule to the In­come Tax Act. Para­graph 2 states that “im­mov­able prop­erty sit­u­ated in SA held by a non-res­i­dent or any in­ter­est or right of what­ever na­ture of that per­son to or in im­mov­able prop­erty sit­u­ated in SA is sub­ject to cap­i­tal gains tax.

An in­ter­est in im­mov­able prop­erty in­cludes or­di­nary shares held by a per­son in a com­pany if 80% or more of the mar­ket value of those shares is at­trib­ut­able to im­mov­able prop­erty and in the case of a com­pany it holds at least 20% of the or­di­nary shares in that en­tity.

Ar­ti­cle 11 of the re-ne­go­ti­ated dou­ble tax agree­ment pro­vides SA with the right to tax in­ter­est aris­ing in SA and paid to a ben­e­fi­cial owner in Mau­ri­tius at a rate of 10% of the gross amount of such in­ter­est.

The 1997 dou­ble tax agree­ment did not al­low SA any tax­ing rights in th­ese cir­cum­stances. The rene­go­ti­ated dou­ble tax agree­ment is there­fore pre­par­ing for the in­tro­duc­tion of in­ter­est with­hold­ing tax which will be levied at the rate of 15% on cross-bor­der in­ter­est flows.

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

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