SARS Interpretation Note 6 Issue 3: Resident: Place of effective management (companies) (source: https://www.sars.gov.za/legal-intr-in-06-resident-place-of-effective-management-companies/)
INTERPRETATION NOTE 6 (Issue 3)
DATE: 30 June 2023
ACT : INCOME TAX ACT 58 OF 1962
SECTION : SECTION 1(1)
SUBJECT : RESIDENT – PLACE OF EFFECTIVE MANAGEMENT (COMPANIES)
Contents
Preamble .............................................................................................................................. 1
1. Purpose ..................................................................................................................... 3
2. Background ............................................................................................................... 3
3. The law...................................................................................................................... 4
4. Application of the law................................................................................................. 5
4.1 General principle – the meaning of place of effective management ........................... 5
4.2 Key facts and circumstances ..................................................................................... 6
4.2.1 Head office ................................................................................................................ 7
4.2.2 Delegation of authority............................................................................................... 9
4.2.3 Board ...................................................................................................................... 10
4.2.4 Modernisation and global travel ............................................................................... 11
4.2.5 Round robin voting .................................................................................................. 12
4.2.6 Shareholders ........................................................................................................... 12
4.2.7 Operational management versus broader top-level management ............................ 14
4.2.8 Legal factors ............................................................................................................ 15
4.2.9 Economic nexus ...................................................................................................... 15
4.2.10 Support functions .................................................................................................... 15
4.3 Effect of the COVID-19 pandemic on a company’s “place of effective management”
................................................................................................................................ 15
5. Conclusion .............................................................................................................. 16
Preamble
In this Note unless the context indicates otherwise –
• “Article” means an Article of the OECD Model Tax Convention 2017;
• “board” means the board of directors or similar body, however designated,
that has the legal authority to exercise the powers and perform the functions of
a company, except to the extent that Company Law or the company’s
Memorandum provide otherwise;
• “Companies Act” means the Companies Act 71 of 2008;
• “company” means a company as defined in section 1(1) and includes
companies incorporated under the Companies Act and companies
incorporated, formed or established under the laws of a country other than
South Africa;
• “Company Law” means the Companies Act or the laws of a country other than
South Africa, as appropriate, under which a company is incorporated, formed
or established;
• “director” means a member of the board or an alternate director and includes
any person occupying the position of director or alternate director, by whatever
name designated;
• “head office” means the place where a company's senior management and
their direct support staff are located or, if they are located at more than one
location, the place where they are primarily or predominantly located.
A company’s head office is not necessarily the same as the place where the
majority of its employees work or where its board typically meets;
• “Memorandum” means a company’s memorandum of incorporation or similar
document, as amended from time-to-time, that sets out the rights, duties and
responsibilities of shareholders, directors and others within and in relation to a
company;
• “OECD” means the Organisation for Economic Co-operation and
Development;
• “OECD Model Tax Convention” means the Model Tax Convention on Income
and on Capital of the Organisation for Economic Co-operation and
Development, Condensed Version, 21 November 2017;
• “South Africa” means the Republic of South Africa;
• “rules” or “by-laws” mean any necessary or incidental rules adopted by the
board or shareholders of a company relating to the governance of the company
on matters that are not addressed in the company’s Memorandum or Company
Law
• “section” means a section of the Act;
• “senior management” means the level of employees of a company who are
generally responsible for developing and formulating key strategies and
policies for the company and for ensuring or overseeing the execution and
implementation of those strategies on a regular and on-going basis. While
terminology may vary, these employees may include –
Managing Director or Chief Executive Officer;
Financial Director or Chief Financial Officer;
Chief Operating Officer; and
the heads of various divisions or departments (for example, Chief
Information or Technology Officer, Director for Sales or Marketing);
• “shareholder agreement” means an agreement between a company's
shareholders which may, amongst other things, set out the shareholders’ rights
and obligations and describe how the company should be operated. It may, for
example, include information on the regulation of the shareholders’
relationship, the management of the company, ownership of shares and
privileges and protection of shareholders;
• “tax treaty” means an agreement (including a convention) entered into
between the government of South Africa and another country for the avoidance
of double taxation;
• “the Act” means the Income Tax Act 58 of 1962; and
• any other word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note provides guidance on the interpretation and application of the term “place of
effective management” in determining the tax residence of a company as one of the
considerations under the tie-breaker rule in a tax treaty.
2. Background
The concept of residency is critical in determining a person’s South African tax
obligations. Generally, 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 South Africa. 1
A person other than a natural person is a “resident” as defined in section 1(1) if such
person –
• is incorporated, established or formed in South Africa; or
• has its place of effective management in South Africa.
The definition 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 defined in section 1(1).
A company incorporated in South Africa is a “resident” as defined before considering
the implications of an applicable tax treaty. Accordingly, from a domestic law
perspective, when determining tax residency, the place of effective management is
relevant to companies not incorporated, established or formed in South Africa.
The term “place of effective management” is not defined 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.
An amendment to Article 4 in the 2017 version of the OECD Model Tax Convention
provides that the place of effective management is no longer the only criterion in
determining the residency of a person other than an individual if it was a resident of
both contracting states. The issue of dual residency of persons other than individuals
1 Definition of “gross income” in section 1(1).
is now determined on a case-by-case basis and through mutual agreement 2 by the
contracting states having regard to the person’s place of effective management, the
place where it is incorporated or otherwise constituted, and any other relevant factors. 3
In the absence of a mutual agreement, the person will not be entitled to any relief or
exemption from tax purely based on the place of effective management, but in a
manner as agreed upon by the competent authorities 4 of the states concerned.
Although this Note deals with the place of 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. The determination of
the place of effective management would, however, take into account the same
considerations as those discussed in this Note. Depending on the applicable facts,
there may be additional considerations that need to be taken into account.
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 financial service as defined in section 1 of the Financial Advisory and
Intermediary Services Act, 2002 (Act No. 37 of 2002); or
2 Mutual agreement refers to the Mutual Agreement Procedure (MAP) as referred to in Article 25 of
the OECD Model Tax Convention. Information on MAP can be found on SARS website at
agreements-protocols/mutual-agreement-procedure-map/ [Accessed 30 June 2023].
3 Paragraph 23 of the Commentary to Article 4. Also see paragraph 2.11 “Dual residency” in the
Guide on Mutual Agreement Procedures.
4 The term “Competent Authority” is used in treaties to identify a position, a person or a body within
a contracting state or jurisdiction to whom issues can be addressed. The Competent Authority in
treaties-agreements/double-taxation-agreements-protocols/mutual-agreement-procedure-
map/ [Accessed 30 June 2023].
(ii) any service that is incidental to a financial service contemplated in
subparagraph (i) where the incidental service is in respect of a financial
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 financial service provider as defined in section 1 of the
Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002), in
terms of a licence issued to that financial 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 necessary for the conduct of its business as a whole are in
substance made. This approach is consistent with the OECD’s commentary on “place
of effective management”. 5
In Oceanic Trust Co Ltd NO v C: SARS, 6 Louw J held that the taxpayer had not made
a case for declaratory relief declaring that it was not a resident of South Africa because
the facts were not “fully found”. 7 However, applying the approach adopted in
Smallwood 8 (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.
Overseas court cases, in the context of tax treaty interpretation, have provided useful
interpretations on the meaning of the “place of effective management”. For example,
in Wensleydale’s Settlement Trustees v Inland Revenue Commissioners, 9 Special
Commissioner David Shirley made the following comment on the ordinary meaning of
place of effective management:
“I emphasise the adjective ‘effective’. In my opinion it is not sufficient that some sort of
management was carried on in the Republic of Ireland such as operating a bank
account in the name of the trustees. ‘Effective’ implies realistic, positive management.
The place of effective management is where the shots are called, to adopt a vivid
transatlantic colloquialism.”
(Emphasis added.)
5 As it read in paragraph 24 of the Commentary on Article 4 in the OECD Model Tax Convention,
dated 15 July 2014. The Commentary on Article 4 in the OECD Model Tax Convention dated
21 November 2017, does not repeat a discussion of the meaning of “place of effective
management”. The discussion in the 2014 version is, however, still relevant and used for purposes
of this Note.
6 [2012] JOL 28880 (WCC), 74 SATC 127.
7 The High Court was not entitled to enquire into and make the required findings of fact.
8 Her Majesty’s Revenue & Customs v Smallwood & another [2010] EWCA Civ 778.
9 [1996] STC (SCD) 241 at 252.
In the Smallwood’s case, 10 the court held that determining the place of effective
management required the court to determine where, based on the facts presented, the
real top level of management or realistic, positive management of the taxpayer, a trust,
was exercised. Although this case dealt with the determination of the place of effective
management in the context of a trust, the court’s decision is considered useful because
the principles and the type of facts that were considered are equally relevant in the
context of companies. The court found that there was a distinction between the scheme
of management (which constituted the key management and commercial decisions)
and day-to-day management exercised by the trustees from time-to-time with the
former determining the place of effective management.
If a company’s key management and commercial decisions affecting its business as a
whole are made at a single location, that location will be its place of effective
management. 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.
Experience has shown that the application of these principles does not present serious
problems in the majority of cases. For example, it is relatively easy to determine a
company’s place of effective management if that company operates in several
countries through branches with local managers but has its head office in South Africa
where most of its senior management are located and where most, if not all, of its
board meetings take place. In contrast, it would be more complicated to determine a
company’s place of effective management if that company is part of a global group that
operates on a divisional as opposed to a separate legal entity basis with senior
management teams who are responsible for different aspects of the business being
based in different locations, and whose senior management teams travel frequently.
This complexity can be compounded when overlaid with modern technology such as
video-conferencing and electronic mail. Despite the potential levels of complexity, the
determination of the place of effective management still involves an application of the
same core principles.
4.2 Key facts and circumstances
There are normally multiple facts that need to be taken into account, often involving
multiple locations, and from those facts and locations it is necessary, as noted above,
to determine a single dominant place where the place of effective management is
located. The determination looks at where the key management and commercial
decisions are regularly and predominantly made. It is not a snapshot requiring an
assessment at a particular moment in time.
Although the determination of the place of effective management is not based on a
snapshot at a particular moment in time, when a company changes its place of
effective management, the change in residence 11 occurs on a particular date and is
not in relation to a year of assessment.
10 Trevor Smallwood Trust v Revenue and Customs [2008] UKSPC SPC00669 in 112 & 114 at 30 and
in 130 at 35 and the subsequent appeal in the Court of Appeal, Her Majesty’s Revenue & Customs
v Smallwood & another [2010] EWCA Civ 778 in 48.
11 Ignoring for the moment its place of incorporation, establishment or formation.
Example 1 – Time period
Facts:
Company A is a listed South African-incorporated multinational company with
branches operating in Africa, United Kingdom and America. Its head office is based in
South Africa and the quarterly board meetings are generally all held in Cape Town.
During the 2021 year of assessment, Company A held the third of its quarterly
meetings in London to coincide with its secondary listing on the London Stock
Exchange and the related interactions with financial advisors and media.
Result:
One meeting of the board of directors in London will not result in the effective
management of the company temporarily moving to the United Kingdom. The senior
management team and the board of directors regularly and predominantly make the
key management and commercial decisions in South Africa and South Africa is
accordingly Company A’s place of effective management.
Definitive rules cannot be laid down in determining the place of effective management,
and all relevant facts and circumstances must be examined on a case-by-case basis.
Although it is not possible to provide a detailed list of all the factors that must be
considered, some of the key facts and circumstances that must be examined in
determining a company’s place of effective management are discussed below. This
list is not intended to be exhaustive but serves merely as a guideline.
The place of effective management test is one of substance over form, that is, ignoring
the evident formalities and determining the real intention or substance. 12 It therefore
requires the identification of those persons in a company who actually “call the shots”
and exercise “realistic positive management”. Stated differently, 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 has been determined, it is necessary to determine
where those decisions are in substance actually made.
4.2.1 Head office
The location of a company’s head office, 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
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.
Conversely, 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.
12 C:SARS v NWK Ltd (27/10) [2010] ZASCA 168; 2011 (2) SA 67 (SCA) ; [2011] 2 All SA 347 (SCA)
(1 December 2010).
The following points apply in relation to head offices:
• A company’s head office 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 offices located in the
various countries where the company operates. In these situations, the
company’s head office would be the location where those senior managers are
primarily or predominantly based or to where they normally return following
travel to other locations or where they 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
relatively permanent basis. In these situations, the members may participate in
meetings via telephone or video-conferencing, that is, virtual meetings, rather
than by being physically present in a principal location. In these situations, the
head office 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 office with
a reasonable degree of certainty. Consequently, in these situations, the
location of a company’s head office would be of little relevance in determining
that company’s place of effective management.
Example 2 – Place of effective management
Facts:
Bigco is a multinational company, incorporated under the laws of the United Kingdom,
with substantial operations in South Africa, the United Kingdom and the United States.
Its shares have a primary listing on the Johannesburg Stock Exchange (JSE), a
secondary listing on the London Stock Exchange, and are also traded on the New York
Stock Exchange through American Depository Receipts.
The company’s head office is located in South Africa and its Managing Director,
Financial Director and Chief Operating Officer are based in South Africa. The divisional
managers who are responsible for the company’s operations in the United Kingdom
and the United States are based in those countries, as are several non-executive
directors.
Bigco’s board makes the key management and commercial decisions for the conduct
of the company’s business as a whole. It generally holds three meetings each year,
one in each of the countries where Bigco operates. Bigco’s Managing Director,
Financial Director and Chief Operating Officer typically attend all of the company’s
board meetings and use the trips to meet with the company’s operational managers in
the United Kingdom and the United States as well as to meet with investors or
investment analysts in those countries. In some instances, these senior board
members attend the board meetings virtually in other countries besides South Africa,
the United Kingdom and the United States.
All of the “board packs” are prepared by personnel at Bigco’s head office, which may
include information sent to the head office by the divisional managers. Head office
personnel, including the Managing Director, Financial Director and Chief Operating
Officer, and their direct staff, are also responsible for developing and formulating
proposed strategic plans for consideration and action by the board. The board actively
reviews these plans before taking a decision and, from time to time, either rejects or
requires modifications to those proposals.
Result:
Under the circumstances, Bigco’s place of effective management is South Africa.
Amongst other things, one of the three board meetings at which decisions are made is
held in South Africa with a majority of board meetings not being held at the other
locations. In addition, its head office and highest level of senior management are both
located in South Africa. The fact that Bigco is incorporated in the United Kingdom is
irrelevant. Furthermore, the fact that senior board members sometimes attend board
meetings in other countries where Bigco operates, does not alter the place of effective
management being South Africa since its head office is in South Africa, which is the
predominant location where key decisions are in substance made. Any circumstantial
evidence related to the company’s economic nexus with any of the countries in
question would also be of limited or no probative value in this instance.
Should there be a change of circumstances which necessitates a board member
moving to a different country and attending board meetings from such country while
also making key management decisions, some of the factors that must be taken into
consideration include whether the move pertains to an exceptional and temporary
period and where the usual and ordinary place of effective management of the
company is. 13
Other factors as provided in paragraph 24.1 in the Commentary on Article 4 14 must
also be considered when determining if there has been a change in the place of
effective management of Bigco.
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
13 OECD “Updated Guidance on Tax Treaties and the Impact of the Covid-19 Pandemic” (21 January
2021) in paragraphs 28 and 29 available online at www.oecd.org/coronavirus/policy-
responses/updated-guidance-on-tax-treaties-and-the-impact-of-the-covid-19-pandemic-
df42be07/ [Accessed 30 June 2023].
14 As provided in the OECD Model Tax Convention dated 13 June 2017.
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. Furthermore, it must, 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 office
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 ratifying decisions that have
been made, the company’s place of effective management will ordinarily be the place
where those senior managers made those decisions. This situation would potentially
apply, for instance, 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 sufficient knowledge and information at hand;
• are suitably qualified and experienced generally and in relation to the particular
company; and
• had reasonable time to assess the information and make the decision.
The details regarding quorums and casting votes and the circumstances in which those
aspects are applied may be relevant. Again, it is necessary to look at all the relevant
facts and circumstances of a particular case.
Similarly, when considering the role of different directors, it must be established
whether the particular director is involved in the decision-making or is perhaps merely
ratifying a decision made by other directors or people. For example, it is possible for a
director to be appointed with a governance-focussed role or as a shareholder
representative and custodian as opposed to being actively involved in making
decisions on behalf of the company. In some companies, executive directors have
traditionally been involved in decision-making while non-executive directors have not
had a decision-making role. A title may give an indication of a particular director’s
involvement in decision-making, although this is not always the case. Accordingly,
while a title may be useful in identifying the role that a particular director performs, it is
the actual role a particular director performs and whether it involves participating in key
management and commercial decisions that is determinative, not the director’s title.
In Laerstate v The Commissioner for Her Majesty’s Revenue & Customs [Corporation
Tax] 15 the court was in the first instance required to consider where the company was
managed and controlled for United Kingdom tax purposes. Secondly, it had to consider
where the company’s place of effective management was for tax treaty purposes. In so
doing, the court was required to consider whether a director acted on another person’s
wishes or instructions without truly considering the merit of those wishes or instructions
or whether the director considered the wishes or instructions but still made the decision
while in possession of the minimum information required to make a decision. In the
interests of brevity, the detailed facts of the particular case, which were critical to the
court’s judgment, are not summarised in this Note. Accordingly, readers who would
like to obtain a deeper understanding of this case should refer to the judgment. See
also Wood & another v Holden (HMIT) 16 and Commissioner for Her Majesty’s Revenue
and Customs v Smallwood & another. 17
In some situations, taxpayers have a pre-meeting which, as the name suggests,
precedes a board meeting. In these circumstances consideration must be given to
what happens in the pre-meeting, who participates, where the meeting takes place and
what, if any, decisions are made since this could impact on the place of effective
management.
4.2.4 Modernisation and global travel
Changes in telecommunications, information technology, global travel, and modern
business practices can impact on the place of effective management. These factors
have meant that physical meetings of the board are often no longer required or
implemented. Further that even when physical board meetings are held in a particular
location some, possibly a majority, of the directors or the key directors with overriding
decision-making powers, are not in the same location as the physical meeting.
Consequently, what initially appears to be the location where the decisions are made,
that is, the physical location of the board meeting, may not be where the key
management and commercial decisions are in substance being made.
Other guidelines as provided by the OECD include, but is not limited to the following: 18
• If senior managers adopt conferencing through the Internet, for example, as a
key medium for making management and commercial decisions and those
managers are located throughout the world, it may be difficult to determine a
place of effective management. In such cases, a place of management might
be regarded as existing in each jurisdiction where a manager is located at the
time of making decisions, but it may be difficult (if not impossible) to point to
any particular location as being the one place of effective management.
15 [2009] UKFTT 209 (TC).
16 [2006] EWCA Civ 26.
17 [2010] EWCA Civ 778.
18 See “The Impact of the Communications Revolution on the Application of ‘Place of Effective
Management’ as a Tie Breaker Rule” www.oecd.org/ctp/treaties/1923328.pdf [Accessed 30 June
2023].
• German case law suggests that, in cases where the place of management
cannot be determined, the residence of a company may be determined by the
residence of the top manager. It may be that this approach could be extended
to companies managed by a board of directors or senior executives. However,
it is likely that situations will increasingly arise where those people are not all
residents of one country.
• A board of directors may arrange to meet in different places throughout the
year. For example, the board of a multinational enterprise may agree to meet
at the offices of the enterprise around the globe on a rotational basis. This can
also lead to an enterprise having a mobile place of effective management.
Accordingly, it is important not to place an undue focus on the location where board
meetings take place without considering the surrounding facts and circumstances of a
particular case.
4.2.5 Round robin voting
The use of round robin voting or a round robin resolution 19 is also something that must
be considered from the perspective of the frequency with which it is used, the type of
decisions made in that manner and where the parties involved in those decisions are
located.
4.2.6 Shareholders
Company law or a company’s rules or by-laws often reserve the making of certain
fundamental decisions for the shareholders of the company. For example, such
decisions may include the sale of all or substantially all of the company’s assets, the
dissolution, liquidation or deregistration of the company, the modification of the rights
– attaching to various classes of shares or the issue of a new class of shares.
Fundamental decisions such as these typically affect the existence of the company
itself or the rights of the shareholders as shareholders, rather than the conduct of the
company’s business from a management or commercial perspective. Accordingly,
such decisions are generally not relevant to the determination of a company’s place of
effective management.
Shareholder involvement can cross the line into that of effective management. For
example, a shareholder may effectively usurp the powers of the directors of the
company. This situation typically (but not necessarily) arises when the company is
wholly owned by a single person (whether a company, other juristic person or
individual) or when there are multiple shareholders, but those shareholders are either
connected persons in relation to each other or are acting in concert. This issue is of
particular concern in connection with passive holding companies located in low-tax
jurisdictions.
19 Section 60 of the Companies Act allows for resolutions to be validly adopted by a written resolution
and not at a meeting of shareholders, known as a “round robin” meeting. If the written resolutions
are supported by enough persons entitled to exercise sufficient voting rights, then the resolution is
adopted and has the same effect as if it had been approved by voting at a validly called meeting.
www.swart.law/post.aspx?id=16 [Accessed 30 June 2023].
There is a distinction between shareholder guidance or influence and usurpation.
Influence does not constitute effective management, but undue influence may do so.
For instance, if the board considers what the shareholder has recommended and
independently makes its own decision, this would not constitute usurpation even if the
decision made by the board is in line with the shareholder’s recommendation.
Importantly, it must be established whether the board independently makes its own
decisions or is merely implementing what the shareholder has already decided for the
company and in that way does not actually make decisions. Depending on the facts,
the line between influence and merely approving or rubber-stamping may be unclear.
Situations in which a shareholder or another party usurps effective management will
probably be the exception rather than the norm.
In Unit Construction v Bullock, 20 the subsidiary companies’ constitutions required that
they be managed by their own boards. The court, however, found that in all matters of
real importance affecting central management and control, the real management and
control was exercised by the board of the parent company. The House of Lords agreed
that although the parent company’s actions were arguably unlawful, it did not override
the factual reality of by whom and from where the subsidiary companies were managed
and controlled.
Shareholders sometimes limit the authority of, or provide guidelines for, the board and
senior managers of a company. For example, a parent company may set limitations of
authority or guidelines for a subsidiary company. These limitations must, in conjunction
with all the other facts and circumstances, be reviewed in detail to determine whether
the effect is that the shareholder is actually making the key decisions or whether the
company, although receiving guidance or some input, is still making them. It is quite
common for a parent company of a multinational group to set guidelines and policies
for the group as a whole in order to direct, coordinate and monitor activities of the entire
group. This does not necessarily mean, and often does not mean, that the subsidiary
company is not making its own decisions, but all the facts must be considered when
making this assessment.
Example 3 – Limitation of authority
Facts:
Company A concludes long-term contracts with clients, which extend over a number
of years. A single contract can have a significant effect on the financial viability of
Company A and as a result Company A’s senior management team sign off on all
contracts. The conclusion of sales contracts represents a predominant key commercial
decision for Company A.
20 [1960] AC 351, [1959] 3 All ER 831, [1959] 3 WLR 1022, 38 TC 712, 38 ATC 351, [1959] TR 345,
52 R&IT 828. See also Laerstate v The Commissioner for Her Majesty’s Revenue & Customs
[Corporation Tax] [2009] UKFTT 209 (TC), Wood & another v Holden (HMIT) [2006] EWCA Civ 26
and Commissioner for Her Majesty’s Revenue and Customs v Smallwood & Another [2010] EWCA
Civ 778.
Under a limitation of authority, the company’s senior management team is restricted to
concluding contracts not exceeding a contract value of R10 million. For contracts
exceeding this value, the company must submit its recommendation to the parent
company and the parent company makes the decision whether or not the contract may
be accepted. The company must implement the parent company’s decision.
90% of contracts have a value that exceeds R10 million.
Result:
Although more detail would be required and all the facts affecting all the key
management and commercial decisions of the company as a whole would have to be
taken into account, the facts suggest that the effective management of the company
may have been usurped by the parent company. The limitation of authority in this case
has effectively removed the company’s real authority to make decisions and has gone
beyond a mere monitoring mechanism or information-reporting requirement.
Limitations of authority and guidelines are common in multi-national groups of
companies. The details are critical in assessing who is, in substance, making the
company’s key management and commercial decisions.
4.2.7 Operational management versus broader top-level management
Operational management decisions are generally of limited relevance in determining
a company’s place of effective management and must be distinguished from the key
management and commercial decisions.
Operational management generally concerns the oversight of the day-to-day business
operations and activities of a company. Key management and commercial decisions
are concerned with broader strategic and policy decisions and tend to be made by
members of the senior management team. A decision to open a major new
manufacturing facility or to discontinue a significant product line would be examples of
key commercial decisions affecting the company’s business as a whole. By contrast,
decisions by the plant manager appointed by senior management to run that facility,
concerning repairs and maintenance, the implementation of company-wide quality
controls, and human resources policies, would be examples of operational
management.
What constitutes a key management or commercial decision as opposed to an
operational management decision is critical since it is the former that is relevant in the
context of establishing the place of effective management. Again, determining what
constitutes a key management or commercial decision is an aspect that can be
determined only on a case-by-case basis. For example, in some businesses the
conclusion of each and every contract will be a key commercial decision while in other
businesses the setting of standardised pricing will be a key commercial decision, but
the conclusion of individual contracts will not be.
Depending on the particular case, the person responsible for operational decisions
may be the same as the person responsible for the key management and commercial
decisions. In this situation it is still necessary to distinguish between the two types of
decisions and to assess where the key management and commercial decisions are
made. The location of this decision-making is critical.
4.2.8 Legal factors
Legal factors such as a company’s place of incorporation, formation or establishment,
the location of its registered office and the location of its public officer are generally not
relevant in the determination of a company’s place of effective management.
4.2.9 Economic nexus
The extent of a company’s economic nexus with a country is generally irrelevant in the
determination of its place of effective management. However, this factor may be
considered circumstantial and given some weight in cases where other factors are
inconclusive.
4.2.10 Support functions
It is not uncommon for a multinational company to centralise certain support functions
such as data management, human resources, customer support or accounting, and to
locate those services in countries that offer advantages such as superior infrastructure,
lower costs or a highly skilled workforce. A group of companies may house these
services in the group’s ultimate holding company or in a separate subsidiary, which
provides the services to all the members of the group.
In these situations, the locations where those services are primarily performed and
where the senior managers responsible for them are based may be different to the
location of the company’s head office where the top senior management and the senior
management’s direct support staff are located. Although such support services may
be essential to a company with support service related policies and procedures having
a company-wide effect, the managers in charge of those services are often not
involved, or only secondarily involved, in making key management and commercial
decisions that affect the conduct of the company’s business as a whole (outside of the
area of the specific support functions that they are responsible for). Consequently, the
location where such support services may be located is generally of limited relevance
to the determination of a company’s place of effective management.
The location where a company’s accounting records are retained will generally not be
indicative of the place where the key management and commercial decisions made in
these circumstances would therefore be irrelevant in determining a company’s place
of effective management.
4.3 Effect of the COVID-19 pandemic on a company’s “place of effective
management”
According to the OECD document “Updated Guidance on Tax Treaties and the Impact
of the COVID-19 Pandemic”, it is stated that the pandemic may raise concerns about
a potential change in the “place of effective management” of a company owing to
relocation, or inability to travel, of board members or other senior executives.
The concern is that such a change may result in a change in a company’s residence
under relevant domestic laws and affect the jurisdiction where a company is regarded
as a resident for tax treaty purposes.
The OECD suggests that it is unlikely that the COVID-19 pandemic will create any
changes to a company’s residence status under a tax treaty, because a temporary
change in location of senior executives would most likely be seen as “an extraordinary
and temporary situation due to the COVID-19 crisis and such change of location should
not trigger a change in residency, especially once the tie breaker rule contained in tax
treaties is applied”. 21
The above approach is one that is accepted by SARS. However, the merits of each
case will be considered before a determination on a company’s place of effective
management is made.
5. Conclusion
A “place of effective management”, in determining the tax residence of a company, is
only one of the considerations under the tie-breaker rule in a tax treaty that adheres to
Article 4 of the OECD Model Tax Convention and its accompanying Commentary.
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”.
A company may have only one place of effective management at any one time.
There are normally multiple facts that need to be taken into account, often involving
multiple locations, and from those facts and locations it is necessary to determine a
single dominant place where effective management is located.
Definitive rules cannot be laid down in determining the place of effective management,
and all relevant facts and circumstances must be examined on a case-by-case basis.
The place of effective management test is one of substance over form. It therefore
requires a determination of those persons in a company who actually “call the shots”
and exercise “realistic positive management”.
Leveraged Legal Products
SOUTH AFRICAN REVENUE SERVICE
Date of 1st issue : 26 March 2002
Date of 2nd issue : 3 November 2015
21 OECD “Updated Guidance on Tax Treaties and the Impact of the Covid-19 Pandemic” (21 January
2021) in paragraphs 28 and 29 available online at www.oecd.org/coronavirus/policy-
responses/updated-guidance-on-tax-treaties-and-the-impact-of-the-covid-19-pandemic-
df42be07/ [Accessed 30 June 2023].
Diamond Export Levy Act, 2007
