10 November 2014
Posted by: Author: Albertus Marais
deeper into South African corporate tax residence rules.
Tax advisors are often approached
by disillusioned corporate clients who have a group company which has been
incorporated offshore (quite often in a low-tax jurisdiction such as Mauritius),
and which has been assessed by the South African Revenue Services (SARS) on the
basis that the company is a tax resident in South Africa. Quite often these structures were set up by
previous tax advisors who failed to explain the practical implications linked
to having an offshore company, and what needs to be done practically to have
that company’s tax residence offshore.
For South African income tax
purposes, tax residence is determined with reference to where that company is effectively managed from, and not
necessarily simply with reference to where that company has been incorporated.
If the ‘place of effective management’ of a company is determined to be in South
Africa, that company will be a tax resident in this country. This is determined by practical factors, for
example where the meetings of the company’s board are held (and are all
directors present at that meeting, as the location from where they may be
calling in to a meeting may also be relevant), where the day-to-day management
of the company is being carried out from, where the senior management of the
company is located, etc. In other words,
is sufficient decision-making substance present in a particular country to
justify its tax residence to be in that country? In this regard, SARS has expressed the view
that, even though a company can be managed from various places, it can only
have one ‘place of effective management’.
Of course, the consequences of
being a tax resident in South Africa include that the company is subject to tax
in South Africa on its world-wide income, as opposed to only its local source
income (which will be the case if the company is not a tax resident in South Africa). However, from an exchange control
perspective, if a company’s place of effective management is going to be in South
Africa, it may still be beneficial to have that company being incorporated
offshore. Even though the company will then be a South African tax resident, it
will still be a non-resident for South Africa’s exchange control purposes. As a
result of the above, it is also possible to have a locally incorporated company
being a non-South African tax resident.
It is also possible for South African
tax resident companies to ‘emigrate’ or relocate from this country for income
tax purposes, which would be the case if a company were to move its place of
effective management from South Africa to another country. In these cases careful consideration should
be given to the potential so-called ‘exit charges’ which may arise as a result
of the relocation of a company.
This article first appeared on the November/December edition on Tax Talk.