Crossborder taxation

taxation 6Author: Albertus Marais (Mazars)

Delving 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 managedfrom, 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.