Place of effective management of a Trust (Oceanic Trust case)
18 November 2011
Posted by: SAIT Technical
Case number 2011/22556/09: The Oceanic Trust Co Ltd NO v SISM
Juta Tax Law
The place of effective management of a trust is where the key management and commercial decisions that are necessary for the conduct of the trust’s business are in substance made.
The facts of the case were briefly that the trust applied to court for a declaratory order that it was not resident in South Africa and that it did not conduct business in this country through a permanent establishment. The applicant, a company registered and incorporated in Mauritius, is the sole trustee of a trust, Specialised Insurance Solutions, (Mauritius) (‘SISM’) which was established and registered in Mauritius on 23 November 2000. The trust deed provided that the trust would be governed by the law of Mauritius and that the business of the trust will be conducted from premises in Mauritius.
SARS required information from SISM under the provisions of s 74A of the Income Tax Act. SISM responded and subsequent to this correspondence SARS issued an assessment in excess of R1,5 billion inter alia on the basis that as SISM had its place of effective management in South Africa, it was a resident of South Africa. Alternatively, if SISM was not a South African resident, it was still taxable as the source of the income was in South Africa. SARS also gave the taxpayer notice that it intended filing a certificate under s 91(1)(b) for the amount, of which the effect would be that a tax court order was obtained. SARS also appointed Standard Bank as the trustee’s agent under which appointment Standard Bank paid over R20 million. SISM approached the High Court for a declaratory order that:
(1) it was not a South African resident;(
2) it did not conduct business in South Africa through a permanent establishment for purposes of the non-resident interest deduction in s 10(1)(h); and
(3) SARS had to repay the R20 million paid on behalf of SISM under the agency provision.
The first issue before the High Court was whether the trust was attempting to avoid the assessment by asking the court for a declaratory order. The court found that as the taxpayer did not ask the court to express a view on the validity of the assessment, but merely to find whether it was a South African resident or not, it was entitled to ask for a declaratory order regarding its tax status.
In deciding whether SISM was resident in South Africa, the judge analysed the tax treaty between South Africa and held that the trust would be resident where its place of effective management is situated. The High Court made it clear that it would adjudicate on the matter as long as the facts were not in dispute.
Regarding the meaning of the term ‘place of effective management’ (‘POEM’), the court accepted the taxpayer’s reliance on a recent decision of the England and Wales Court of Appeal in Commissioner for Her Majesty’s Revenue and Customs v Smallwood and Anor  EWCA Civ 778 delivered on 10 July 2010 in which it was held that the POEM of a trust is where the key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. Although no definite rule can be laid down as all relevant facts and circumstances need to be examined, an entity’s place of effective management will ordinarily be where the most senior group of people (eg the board of directors) makes its decision or where the actions taken by the entity as a whole are determined.On the facts of the particular case, the court held that, on the basis of the Smallwood test, the possibility could not be excluded that SISM’s place of effective management was in South Africa.
(Editorial comment: It is submitted that it would be wrong to use the case as authority for the view that the place of effective management is always where the central management of an entity is situated. Not only did the court make it clear that all factors have to be taken into account, but it also merely decided the case on the test laid down in the Smallwood decision. It did not decide that the test in the Smallwood decision is the only test.) The test to determine whether the SISM had a permanent establishment in South Africa does not depend on whether it carried on business wholly or partly through a fixed place of business in South Africa.
As the High Court does not have jurisdiction to make factual findings, the court could not rule on the question.As far as the third issue was concerned, the court also dismissed the application. An agent can only be appointed under s 99 for taxes that are due. Although the agent was appointed after the assessment was issued, the tax was only due on or after the date set for payment. However, interest on the outstanding amount was immediately payable once the assessment was raised.
As a result the court refused to grant the declaratory order and dismissed the application with cost.
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