The concept of the "place of effective management" was considered in the recent judgment of the Western Cape High Court in the matter between The Oceanic Trust Co. Ltd N.O, and the Commissioner for the South African Revenue Service ("SARS") (as yet unreported).

Oceanic Trust is a Mauritian registered and incorporated company which was the sole trustee of a trust in Mauritius ("SISM").  Oceanic Trust was the applicant in this case in its capacity as the trustee of SISM.

SISM carried on business as a captive reinsurer to MCubed Life Ltd.  The premiums of the reinsurance policies were transferred to SISM and constituted assets invested by SISM in South Africa and elsewhere.  In respect of the South African assets, SISM utilised an asset manager in South Africa.

SARS issued assessments to SISM, inter alia, on the basis that SISM was a South African resident by virtue of having its place of effective management in South Africa.  SISM approached the High Court to issue a declaratory order declaring, inter alia, that it was not a resident of South Africa.

SISM submitted that its management decisions would have been taken by its sole trustee (i.e. Oceanic Trust) and that such decisions would have been made in Mauritius. Reliance was placed on a recent UK decision, Commissioner for Her Majesty's Revenue and Customs v Smallwood and Anor [2010] EWCA Civ 778.

The High Court held that the relevant key features of the Smallwood case relating to the place of effective management of an entity are, inter alia, the following:

  • The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made;
  • The place of effective management will ordinarily be the place where the most senior group of persons (e.g. a board of directors) makes its decision, where the actions to be taken by the entity as a whole are determined;
  • No definite rule can be given and all relevant facts and circumstances must be considered to determine the place of effective management of an entity; and
  • Although there may be more than one place of management, there may only be one place of effective management at any one time.

It should be noted that SISM did not provide SARS with any documentation to substantiate the claim that management decisions were made in Mauritius.  As such, this had not been factually established.

The High Court only had jurisdiction to hear the matter if the issues to be decided were questions of law and did not require the court to make a finding of fact.  It was held that the question was not simply a question of law and that the Court was not entitled to enquire into and make findings of fact.  The request for the declaratory order was dismissed on the following basis:

"...even if the facts are sufficiently clear to make a decision, the place where key management and commercial decisions that were necessary for the conduct of SISM's business, were in substance made, has in my view not been established to be outside South Africa.  ... Therefore, applying the Smallwood test, the facts to the extent that they have been established, do not, in my view, establish that the place of effective management of SISM was in Mauritius, and not in South Africa."  (our emphasis)

As the facts in the case were not sufficiently clear, in our view, no significant inferences can be made from the dismissal of the request for the declaratory order.  However, in our view, the importance of this decision is the acknowledgement by the Court that the place of effective management of a person other than a natural person is the place where key management and commercial decisions that are necessary for the conduct of a person's business are in substance made.

This interpretation corresponds to that of the Commentary of the Organisation for Economic Co-operation and Development ("OECD Commentary") and casts doubt on the accuracy of SARS' Interpretation Note on the meaning of "effective management" which seems to focus on day to day management.

Although the Interpretation Note also acknowledges that the factual circumstances of each case must be considered and that there is no hard and fast rule, the Interpretation Note seems to focus more on the day-to-day management as is evidenced by the following statement:

"the place where the company is managed on a regular or day-to-day basis by the directors or senior managers of the company, irrespective of where the overriding control is exercised, or where the board of directors meets." (our emphasis)

The Oceanic Trust decision is therefore welcome guidance on the meaning of the term "place of effective management" in the South African context.

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