SARS Guides On Place Of Effective Management

The South African Revenue Service (SARS) has issued an interpretation note to provide guidance on the term “place of effective management” for the purposes of determining the tax residence of a company in South Africa.

SARS notes that, in general, a resident is liable to income tax on gross income derived within and outside South Africa, while a non-resident is liable to income tax only on gross income from a source within the country. A person other than a natural person is defined as a “resident” in the South African tax code if such person is incorporated, established or formed, or has its place of effective management in the country.

Although not defined in the tax code, it is confirmed that the determination of the place of effective management is consistent with when that term is used as a tie-breaker rule in a tax treaty that adheres to the OECD Model Tax Convention.

For example, the note says that 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 made. However, if those decisions are made at more than one location, the company’s place of effective management will be the location where those decisions are primarily or predominantly made.

It also points to the location of a company’s head office, being the place where a company’s senior management and their support staff are predominantly located, as being 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.

However, if a company’s board delegates some or all of its authority to an executive committee, which consists of key members of senior management, and which formulates key strategies and policies for mere formal approval by the full board, the base of the members of the executive committee will often be considered the company’s place of effective management, the note states.

Finally, it says that legal factors, such as a company’s place of incorporation and the location of its registered office, are generally not relevant in the determination of a company’s place of effective management. The extent of a company’s economic nexus with South Africa is also generally irrelevant, but may be considered circumstantial and given some weight in cases where other factors are inconclusive.