Tax residence Companies and Trusts - Place of effective management (The Oceanic Trust Case)
08 July 2011
Posted by: SAIT Technical
PWC Tax Synopsis - June 2011
Tax residence – A court gives some guidance One of the principal determinants of residence of a company or trust is the location of its place of effective management. For the first time in ten years, we have obtained some insight into the manner in which our courts may approach the interpretation of this term, which is so vital to certainty (The Oceanic Trust Co. Ltd N.O. v C:SARS Western Cape High Court Case No. 22556/09)
At issue was the operation of a trust established in Mauritius which owned substantial investments in South Africa. If the trust was found not to be a resident, then it could only be subject to tax in South Africa if the requirements of the double taxation agreement between South Africa and Mauritius so permitted. However, if it was found to be a resident of the Republic, its income would become taxable in South Africa.
The trust was part of a listed group’s structure and maintained its entire investment portfolio in South Africa. The investments were under the control of a local fund manager, and SARS asserted that the instructions regarding the transactions in relation to the portfolio were issued by South African group companies.
SARS asserted that the Trust was a resident of the Republic, having regard to the facts that numerous decisions appeared to have been taken in the Republic and that they had not been furnished with minutes or trustees resolutions that substantiated the Trusts assertions.
Key place of effective management
The trust’s argument was simple, it relied on a recent United Kingdom decision that had laid down as a principle that the location of the place of effective management of a trust is the place where the real top level management of the trust occurs and not merely its day to day management. It relied in this instance on the matter of Commissioner for Her Majesty’s Revenue and Customs v Smallwood & Anor  EWCA Civ 778.
In that case, a trust which had been established in the United Kingdom and controlled by United Kingdom trustees had, for a short period, been managed by a single trustee in Mauritius for purposes of effecting a particular transaction, after which the trustee resigned and was replaced by the original United Kingdom trustees. The Court in that matter had found that the trust had never ceased to be effectively managed from the United Kingdom. Nevertheless, the key principle is that the place of effective management is the place where the trustees exercise control.
Thus, the Mauritian trust argued in the Western Cape High Court, if it had never had any trustee other than a Mauritian trustee, it must be regarded as having its place of effective management in Mauritius.
The Court was not persuaded by this argument. It found that the decision in the United Kingdom matter was based on the interpretation of a particular section of the United Kingdom law that determined the status of trustees as a single continuing body. In addition, there was insufficient factual information at its disposal to determine where the trust was resident and this was an issue that would need to be determined by the Tax Court in due course on the basis of evidence that should be led in this regard. In passing, the Court pointed to the importance of the evidence in this determination.
What must be established is the place where the key management and commercial decisions are taken. While the place of effective management will ordinarily be the place where the most senior body of persons (e.g. board of directors, trustees) makes its decisions, no definite rule can be given and the location of the place of effective management must be determined on the basis of the relevant facts and circumstances.
Formulaic approach unlikely here
It is clear from this decision that a formulaic approach to the location of the place of effective management is unlikely to be applied in South Africa. Merely holding board meetings in a particular location is not likely to prove conclusive. It will be necessary to establish that the decisions that are key to the operation were in substance taken at those directors’ meetings. The production of relevant minutes of meetings and discussion records will be a vital part of this trail of evidence.