Page 196 - SAIT Compendium 2016 Volume2

IN 6 (2) Income Tax acT: InTeRPReTaTIon noTes IN 6 (2)
The de nition excludes any person that is deemed to be exclusively a resident of another country for purposes of the application of any tax treaty. In addition, special considerations apply to a ‘foreign investment entity’ as de ned in section 1(1).
A company which is incorporated in South Africa is a resident as de ned before considering the application of an applicable tax treaty. Accordingly, from a domestic law perspective, when determining tax residency, the place of effective management is relevant to companies which are not incorporated, established or formed in the Republic.
The term ‘place of effective management’ is not de ned in the Act and must be ascribed its ordinary meaning, taking into account international precedent and interpretation. It does, however, not have a universally accepted meaning and various countries, including members of the OECD, continue to attach different meanings to it.
The purpose of this Note is to discuss the principles and guidelines that will be applied for purposes of considering the de nition of ‘resident’ in section 1(1). These principles and guidelines are consistent with the determination of the place of effective management when that term is used as a tie-breaker rule in a tax treaty that adheres to paragraph 3* of Article 4 of the condensed version of the OECD Model Tax Convention as at 15 July 2014 and its accompanying Commentary.
Although this Note deals with effective management in the context of companies, the underlying principles will generally apply to other entities and bodies of persons that are not natural persons. For example, with a trust the structures involved and terminology used may require some adaptation but the determination of the place of effective management would take into account the same considerations as those discussed in the Note. Depending on the facts applicable there may be additional considerations that need to be taken into account.
Many countries have introduced legislation creating a variety of hybrid entities that combine traditional features of partnerships and companies. A number of countries have also enacted legislation creating new types of trusts. These new business vehicles may present unique issues that are not speci cally addressed in this Note.
The place of effective management must be supported by the facts. Under section 102 of the Tax Administration Act 28 of 2011 a company bears the onus of proving its place of effective management and must, under section 29 of that Act, retain the necessary evidence to support the view taken.
3. The law
Section 1(1) – Resident ‘resident’ means any—
(a) . . .
(b) 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: Provided that where any person that is a resident ceases to be a resident during a year of assessment, that person must be regarded as not being a resident from the day on which that person ceases to be a resident: Provided further that in determining whether a person that is a foreign investment entity has its place of effective management in the Republic, no regard must be had to any activity that—
(a) constitutes—
(i) a nancial service as de ned in section 1 of the Financial Advisory and Intermediary Services Act, 2002 (Act
37 of 2002); or
(ii) any service that is incidental to a nancial service contemplated in subparagraph (i) where the incidental
service is in respect of a nancial product that is exempted from the provisions of that Act, as contemplated in
section 1(2) of that Act; and
(b) is carried on by a nancial service provider as de ned in section 1 of the Financial Advisory and Intermediary
Services Act, 2002 (Act 37 of 2002), in terms of a licence issued to that nancial service provider under section 8 of that Act;
4. Application of the law
4.1 General principle – the meaning of place of effective management
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 ‘place of effective management’. The place of effective management is used in paragraph 3 of Article 4 of the OECD’s Model Tax Convention on Income and on Capital as a tie-breaker when a person other than an individual is considered, before the application of the tie-breaker, to be a resident of both the Contracting States which are parties to the tax treaty. The application of the tie-breaker results in the person being deemed to be a resident only of the State where its place of effective management is located.
In Oceanic Trust Co Ltd NO v C: SARS Louw J held that the taxpayer had not made out a case for declaratory relief declaring that it was not a resident of South Africa because the facts were not ‘fully found’. However, applying the approach adopted in Smallwood (which is consistent with that set out in the preceding paragraph), Louw J noted that to the extent the facts were established, they did not establish that the place of effective management was in Mauritius and not South Africa.
* The place of effective management is the only criterion considered in paragraph 3. The alternative mutual agreement tie-breaker mentioned in paragraph 24.1 of the Commentary is applied in a number of tax treaties. It takes a number of criteria into account of which the place of effective management is one. The criteria considered in the alternative tie- breaker are not discussed in this Note.
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