Tax Residency - Place Of Effective Management In South Africa

Introduction

The concept of residency is a crucial determinant in establishing a person's tax obligations in South Africa. Generally, a resident is liable to pay tax on taxable income derived from South Africa and globally, while non-residents are liable to income tax on taxable income from a source within South Africa1.

A juristic person is regarded as being resident in South Africa under the Income Tax Act 58 of 1962 (the Act) if such juristic person is:

incorporated in South Africa; or has its place of effective management (the POEM) in South Africa. The term POEM does not have a universally accepted meaning and countries, including members of the Organisation for Economic Co-operation and Development (OECD), attach varying meanings to it. In this article is we discuss the approach which our courts and the South African Revenue Services (SARS) have adopted in determining the POEM of juristic persons.

Commissioner for Her Majesty's Revenue and Customs v. Smallwood and Anor [2010] EWCA Civ 778 (Smallwood)

In Smallwood, the court held that, in order to determine the POEM of a trust, the court had to establish where the real top level of management of the taxpayer was exercised. The court distinguished between the place where key management and commercial decisions of the trust were made (which is important for the purposes of determining the POEM) and the place where the day-to-day management of the trust is exercised by the trustees (which does not necessarily affect where the POEM is).

Oceanic Trust Co. Ltd N.O. and the Commissioner for the South African Revenue Service (Oceanic Trust)

In the case of Oceanic Trust, the trust applied to court for a declaratory order that it was not tax resident in South Africa, on the basis that it did not conduct business in South Africa. The applicant, a company registered and incorporated in Mauritius, was the sole trustee of the trust. The applicant relied on the test used in Smallwood to substantiate its application for a declaratory order. The High Court accepted the reliance by the applicant on the test applied in Smallwood, and outlined the salient features of the case as follows:

the POEM is the place where key management and commercial decisions that are necessary for the conduct of business are made; no definitive rule can be applied when establishing the POEM of an entity, and all relevant facts and circumstances must be considered to determine the POEM; the POEM will ordinarily be the place...