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The new MOU with Mauritius

Monday, 29 June 2015   (0 Comments)
Posted by: Author: BDO South Africa
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Author: BDO South Africa

SARS signed a Memorandum of Understanding (MOU) with the Mauritius Revenue Authority (MRA) on 22 May 2015.

The MOU followed the new Double Taxation Agreement (DTA) between South Africa and Mauritius, which was signed in Maputo on 17 May 2013. Both countries have now ratified the DTA, which is expected to come into effect on 1 January 2016.

The current DTA decides the tie-breaker to determine the residence of a juristic person to be the ‘place of effective management', whereas the new DTA determines that, in the case of a juristic person resident in both Contracting States, the Competent Authorities will settle or agree residence mutually.

The Competent Authorities will also determine the mode of application of the Agreement to such a person. In the absence of such an agreement, this person will be considered to be outside the scope of the DTA except for Exchange of Information provisions. In Mauritius, the term ‘Competent Authorities' means the Director General of the Mauritius Revenue Authority or an authorised representative of the Director General, whereas in South Africa it refers to the Commissioner for the South African Revenue Service or authorised representative.

The MOU, in determining the residence status of a juristic person, considers ‘place of effective management' to be one of a number of factors to decide residence. Where agreement is not reached, the benefits of the DTA cannot be used, except to the extent and manner agreed on by the Competent Authorities.

SARS may take a different view on the new tie-breaker clause. The tie-breaker clause does not impact South Africa's domestic tax law, which provides that a juristic person who is incorporated, established or formed outside SA and has their place of effective management outside of SA is not a resident as defined. The new tie-breaker provisions are contained in the MOU and should be taken into account in addition to the place of effective management and the place of incorporation to determine the residence. Determining ‘place of effective management' is imperative to determine residence for South African Income Tax purposes and is in addition to the tests contained in the DTA.

The term ‘place of effective management' is not defined for South African Income Tax purposes but has been considered in many international tax cases. The Commentary on the OECD Model Tax Convention on Income and on Capital (OECD Commentary) provides that ‘place of effective management' is where key management and commercial decisions necessary for the conduct of the entity's business as a whole are made in substance.

SARS recently released the second issue of Draft Interpretation Note 6 (DIN6-2), which deals with the meaning of ‘place of effective management'. DIN6-2 interprets the term not vastly different from the OECD Commentary. In terms of DIN6-2:

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.

As a result, if a juristic person (who is not incorporated and does not have their place of effective management in SA) earns income from a non-South African source, the company is not a ‘resident' for South African Income Tax purposes and no liability arises, regardless of the additional ‘place of effective management' factors in the MOU. A company incorporated in South Africa with a place of effective management in Mauritius would be resident for South African Income Tax purposes.

Where the central management and control are in Mauritius, it would also constitute a resident for Mauritian tax purposes. The new DTA would then require that the Competent Authorities determine residence by applying the MOU. The same would apply if the company is incorporated in Mauritius but its place of effective management is in South Africa.

SARS will in all likelihood not interpret the tie-breaker clause as overriding the South African Income Tax definition of ‘resident' or interpret the other factors in the MOU as tests to determine place of effective management of a juristic person. Albeit that some of these other factors may be relevant, it would be a separate enquiry. SARS and the MRA will probably need to agree place of residence for purposes of the tie-breaker on a case-by-case basis.

The other factors listed in the MOU in addition to ‘place of effective management' and the place in which the juristic person is incorporated, to determine residence for purposes of the DTA, include:

  • where the meetings of the Board of Directors or equivalent body are held;
  • where the Chief Executive Officer and other Senior Executives perform their activities;
  • where the senior day-to-day management is carried out;
  • where the headquarters are located;
  • which country's laws govern the legal status of the person;
  • where its accounting records are kept;
  • other factors in the OECD Commentary (para. 24.1); and
  • other factors identified and agreed on by the Competent Authorities.

This article first appeared on 



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