Page 198 - SAIT Compendium 2016 Volume2

IN 6 (2) Income Tax acT: InTeRPReTaTIon noTes IN 6 (2)
The place of effective management test is one of substance over form. It therefore requires the identi cation of those persons in a company who actually ‘call the shots’ and exercise ‘realistic positive management’. Otherwise stated, a company’s place of effective management must be determined by ascertaining what are and who makes the key management and commercial decisions for the conduct of the company’s business as a whole. Once this determination has been made, it is necessary to determine where those decisions are in substance actually made.
4.2.1 Head of ce
The location of a company’s head of ce, being the place where a company’s senior management and their support staff are predominantly located, is generally a major factor in the determination of a company’s place of effective management because it often represents the place where key company decisions are made. For example, it is probably likely that key management and commercial decisions of an operating company whose board meets only once a year will be made more frequently than once a year and that the place of effective management will not be where the board meeting is held. Similarly, board meetings could be held more frequently but key management and commercial decisions may nevertheless be made outside those board meetings. All the facts and circumstances must be considered. The following points apply in relation to head of ces:
• A company’s head of ce is easy to determine when all the company’s senior management and their support staff are based in a single location and that location is held out to the public as the company’s principal place of business or headquarters.
• A company may be more decentralised. For example, various members of senior management may operate, from time to time, at of ces located in the various countries where the company operates. In these situations, the company’s head of ce would be the location where those senior managers are primarily or predominantly based or where they normally return to following travel to other locations or meet when formulating or deciding key strategies and policies for the company as a whole.
• Members of senior management may operate from different locations on a more or less permanent basis. In these situations, the members may participate in meetings via telephone or video conferencing rather than by being physically present at meetings in a principal location. In these situations, the head of ce would normally be the location, if any, where the highest level of management (for example, the Managing Director and Financial Director) and their direct support staff are located.
• Finally, there may be some situations in which senior management is so decentralised that it is not possible to determine the company’s head of ce with a reasonable degree of certainty. Consequently, in these situations, the location of a company’s head of ce would be of less relevance in determining that company’s place of effective management.
4.2.2 Delegation of authority
A company’s board may delegate some or all of its authority to one or more committees such as an executive committee consisting of key members of senior management. In these situations, the location where the members of the executive committee are based and where that committee develops and formulates the key strategies and policies for mere formal approval by the full board will often be considered the company’s place of effective management.
The delegation of authority may be either de jure (by means of a formal resolution or Shareholder Agreement) or de facto (based upon the actual conduct of the board and the executive committee). Again, the goal is to determine where the key management and commercial decisions for the company as a whole are in substance made and not where those decisions are merely formally approved. This determination applies irrespective of whether the delegation is formal or informal, enforceable or not. It is critically important to consider what the executive committee does in assessing whether its functions amount to making key management and commercial decisions.
4.2.3 Board
The location where a company’s board regularly meets and makes decisions may often be the company’s place of effective management provided the board retains and exercises its authority to govern the company and does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole. This situation often prevails when the board meetings are held in the same country as the country where the company’s head of ce is located and all the directors participating in the board meetings are physically present at the meetings. The impact on the place of effective management arising from the holding of board meetings in different locations is another aspect that requires consideration. The location of the board meetings, assuming for the moment it is the place where the key management and commercial decisions are made, may or may not be the same as the place where the relevant directors are tax resident. It can also be useful to examine how a company’s board handled a crisis or various crises, expected or unexpected, that arose during the relevant period.
There is, however, no assumption that a company’s place of effective management must be where its board meets. For example, if a board has de facto delegated the authority to make the key management and commercial decisions for the company to the senior managers and does nothing more than routinely ratify decisions that have been made, the company’s place of effective management will ordinarily be the place where those senior managers make those decisions. This situation would potentially apply, for example, when the formal board meetings are held in a location that bears no relationship to the company’s activities or the primary location from where the senior managers perform their duties. Management structures, reporting lines and responsibilities vary from company to company and no hard and fast rules exist.
In considering whether a board is making the decisions or, alternatively, is limited to formally approving or rubber- stamping the decisions made by someone else, a variety of factors must be taken into consideration. These factors include, for example, whether the directors have suf cient knowledge and information at hand, whether the directors
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