Determining the residency of companies: Difficulties in interpreting ‘place of effective management’

Nirupa Padia,Warren Maroun

doi:10.4102/jef.v5i1.309

Abstract

Even South Africa’s Income Tax Act No. 58 of 1962 uses the terminology ‘place of effective management’ when determining the residency of companies. This term is not, however, defined in the said legislation and there is no South African case law specifically dealing with this matter. In contrast, the United Kingdom (UK) uses the term ‘central management and control’, and its courts have been called upon to hear numerous cases on the interpretation of this phrase. Given the increasing pressure on South Africa to align its tax treatment with international trends as well as increased levels of trade with the United Kingdom, this study examined the interpretation of ‘place of effective management’ in a South African context and juxtaposed this with the conclusions reached in seven cases in the United Kingdom dealing with the interpretation of ‘centre of management and control’. The findings show that ‘place of effective management’ from a South African perspective may depend heavily on where decisions are implemented and day-to-day operations occur. ‘Central management and control’, however, appears to vest almost exclusively in where primary decisions are made or strategic directions emanate from.

Highlights

The system of international corporate taxation is often based on the ‘residence principle’, with the vast majority of countries relying on the place of residence of a company to determine its tax liability (Greenleaf, 2003; Mult, Jacobs, Spengel & Schafer 2003)
The second part of the definition, which refers to where a company is effectively managed, is a more complex question which is subject to interpretation, as no definition or explicit guidance is given in the South African Income Tax Act and there is an absence of South African case authority on the matter (Casey, 2001; Van der Merwe, 2006; Stiglingh et al, 2011)
The sale by CIL Ltd of its interest in Holdings Ltd to Eulalia Ltd constituted contended revenue in the United Kingdom (UK). This case reaffirmed the relevance of the ‘central management and control’ test cited in De Beers Consolidated Mines Ltd v Howe, with the court concluding that key management decisions were relevant in deciding on the residency status of a taxpayer

Summary

INTRODUCTION

The system of international corporate taxation is often based on the ‘residence principle’, with the vast majority of countries relying on the place of residence of a company to determine its tax liability (Greenleaf, 2003; Mult, Jacobs, Spengel & Schafer 2003). The second part of the definition, which refers to where a company is effectively managed, is a more complex question which is subject to interpretation, as no definition or explicit guidance is given in the South African Income Tax Act and there is an absence of South African case authority on the matter (Casey, 2001; Van der Merwe, 2006; Stiglingh et al, 2011). In view of the above, by performing a content analysis of key literature on the residence basis of taxation in South Africa, and related case authority from the UK, this research evaluates the differences in the interpretation of ‘place of effective management’ and ‘management and control’ as applied in South Africa and the UK respectively. It should be noted that the research explores only the phrases ‘place of effective management’ and ‘management and central control’ and deals with juristic taxpayers

Interpretation Note 6

INTERPRETATIONS OF ‘CENTRAL MANAGEMENT AND CONTROL’ IN THE UNITED KINGDOM

Summarising the cases

CONCLUSION