INTERPRETATION NOTE: NO.

6 (Issue 2)

DATE: 3 November 2015

ACT : INCOME TAX ACT NO. 58 OF 1962

SECTION : SECTION 1(1)
SUBJECT : RESIDENT – PLACE OF EFFECTIVE MANAGEMENT (COMPANIES)

CONTENTS

PAGE
Preamble .............................................................................................................................. 1
1. Purpose ..................................................................................................................... 3
2. Background ............................................................................................................... 3
3. The law...................................................................................................................... 4
4. Application of the law................................................................................................. 4
4.1 General principle – the meaning of place of effective management ........................... 4
4.2 Key facts and circumstances ..................................................................................... 6
4.2.1 Head office ................................................................................................................ 7
4.2.2 Delegation of authority............................................................................................... 8
4.2.3 Board ........................................................................................................................ 8
4.2.4 Modernisation and global travel ................................................................................. 9
4.2.5 Shareholders ........................................................................................................... 10
4.2.6 Operational management versus broader top level management ............................ 11
4.2.7 Legal factors ............................................................................................................ 12
4.2.8 Economic nexus ...................................................................................................... 12
4.2.9 Support functions .................................................................................................... 13
5. Effective date........................................................................................................... 14
6. Conclusion .............................................................................................................. 14

Preamble
In this Note unless the context indicates otherwise –
• “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 No. 71 of 2008;
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• “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 the
Republic;
• “Company Law” means the Companies Act or the laws of a country other
than the Republic, 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;
• “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 the Republic and another country for the
avoidance of double taxation;
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• “the Act” means the Income Tax Act No. 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.

2. Background
The concept of residency is critical in determining a person’s South African tax
obligations. In general, a resident is liable to income tax on gross income derived
within and outside the Republic while a non-resident is liable to income tax only on
gross income from a source within the Republic. 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 the Republic; or
• has its place of effective management in the Republic.

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 which is incorporated in South Africa is a resident as defined 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 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.

The purpose of this Note is to discuss the principles and guidelines that will be
applied for purposes of considering the definition 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 32 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

1
Definition of “gross income” in section 1(1).
2
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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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 specifically addressed in this Note.

The place of effective management must be supported by the facts. Under

section 102 of the Tax Administration Act No. 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
(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 that are necessary for the conduct of its business as a
whole are in substance made. This approach is consistent with the OECD’s
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commentary on the term “place of effective management”. 3 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 4 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”. 5 However, applying the approach adopted in
Smallwood 6 (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, 7 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.)

In Smallwood’s case 8 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.

A company may have more than one place of management but it can only have one
place of effective management at any one time. 9 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
3
Paragraph 24 of the Commentaries on the Articles of the Model Tax Convention on Income and
on Capital, Condensed version, dated 15 July 2014 at 90.
4
[2012] JOL 28880 (WCC), 74 SATC 127.
5
The High Court was not entitled to enquire into and make the required findings of fact.
6
Her Majesty’s Revenue & Customs v Smallwood & another [2010] EWCA Civ 778.
7
[1996] STC (SCD) 241 at 252.
8
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.
9
This is consistent with paragraph 24 of the Commentaries on the Articles of the Model Tax
Convention on Income and on Capital, Condensed version, dated 15 July 2014 at 91.
 6

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, the determination in the case of a
company that is part of a global group that operates on a divisional as opposed to a
separate legal entity basis with senior management teams that are responsible for
different aspects of the business being based in different locations, and whose senior
management teams travel frequently, would be more complicated. This complexity
can be compounded when overlaid with modern technology such as video-
conferencing and electronic mail. Notwithstanding 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 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 10 occurs on a particular date and is
not in relation to a year of assessment.

Example 1 – Time period

Facts:
Company A is a listed South African-incorporated multinational company with
branches operating in Africa, Europe and America. Its head office is based in South
Africa and the quarterly board meetings are generally all held in Cape Town.

During the 2015 year of assessment Company A held the 3rd 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.

10
Ignoring for the moment its place of incorporation, establishment or formation.
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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. It therefore
requires the identification 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 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 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 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 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 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
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location of a company’s head office 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
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 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 sufficient knowledge and information at hand,
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whether the directors are suitably qualified and experienced generally and in relation
to the particular company, and whether the directors 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 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] 11 the court was in the first instance required to consider where the company was
managed and controlled for United Kingdom tax purposes and 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 judgement, are not summarised in this Note.
Accordingly, readers who would like to obtain a deeper understanding of the
particular case should refer to the judgment. See also Wood & another v Holden
(HMIT) 12 and Commissioner for Her Majesty’s Revenue and Customs v Smallwood &
another. 13

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 or, alternatively, 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

11
[2009] UKFTT 209 (TC).
12
[2006] EWCA Civ 26.
13
[2010] EWCA Civ 778.
 10

key management and commercial decisions are in substance being made. The use
of round robin voting 14 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.

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 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.

However, 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.

There is a distinction between shareholder guidance or influence and usurpation.

Influence does not constitute effective management but undue influence may do so.
For example, 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, 15 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

14
A resolution passed around for signature without the signatories gathering together in a meeting.
15
[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.
 11

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 of
authority or guidelines 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 entity 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 group as a whole. 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 2 – 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.

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.

4.2.6 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.
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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. For example, a decision to open
a major new manufacturing facility or to discontinue a major 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.

4.2.7 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.

4.2.8 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.

Example 3 – 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 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.
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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.

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 where 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. 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.

4.2.9 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 are
made and in these circumstances would therefore be irrelevant in determining a
company’s place of effective management.
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5. Effective date
SARS does not anticipate that the application of this Note, as opposed to its
predecessor (Issue 1 of this Note), will result in many, if any, companies previously
held to have their place of effective management outside South Africa now being
held to have it in South Africa, and vice versa. However, if a company feels it is in
this position, SARS would welcome the opportunity to discuss the facts of the case
with the company concerned.

This Note is effective for years of assessment commencing on or after the date of
publication.

6. Conclusion
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 more than one place of management but it can only have 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 therefore 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”.

Legal and Policy Division

SOUTH AFRICAN REVENUE SERVICE
Date of 1st issue : 26 March 2002