The concept of residency is a crucial determinant in establishing a person's tax obligations in South Africa. Generally, a resident is liable to pay tax on taxable income derived from South Africa and globally, while non-residents are liable to income tax on taxable income from a source within South Africa1.

A juristic person is regarded as being resident in South Africa under the Income Tax Act 58 of 1962 (the Act) if such juristic person is:

  1. incorporated in South Africa; or
  2. has its place of effective management (the POEM) in South Africa.

The term POEM does not have a universally accepted meaning and countries, including members of the Organisation for Economic Co-operation and Development (OECD), attach varying meanings to it. In this article is we discuss the approach which our courts and the South African Revenue Services (SARS) have adopted in determining the POEM of juristic persons.

Commissioner for Her Majesty's Revenue and Customs v. Smallwood and Anor [2010] EWCA Civ 778 (Smallwood)

In Smallwood, the court held that, in order to determine the POEM of a trust, the court had to establish where the real top level of management of the taxpayer was exercised. The court distinguished between the place where key management and commercial decisions of the trust were made (which is important for the purposes of determining the POEM) and the place where the day-to-day management of the trust is exercised by the trustees (which does not necessarily affect where the POEM is).

Oceanic Trust Co. Ltd N.O. and the Commissioner for the South African Revenue Service (Oceanic Trust)

In the case of Oceanic Trust, the trust applied to court for a declaratory order that it was not tax resident in South Africa, on the basis that it did not conduct business in South Africa. The applicant, a company registered and incorporated in Mauritius, was the sole trustee of the trust. The applicant relied on the test used in Smallwood to substantiate its application for a declaratory order. The High Court accepted the reliance by the applicant on the test applied in Smallwood, and outlined the salient features of the case as follows:

  • the POEM is the place where key management and commercial decisions that are necessary for the conduct of business are made;
  • no definitive rule can be applied when establishing the POEM of an entity, and all relevant facts and circumstances must be considered to determine the POEM;
  • the POEM will ordinarily be the place where the most senior group of persons (such as the board of directors) makes its decisions, and where the actions to be taken by the entity as a whole are determined; and
  • an entity can have more than one POEM.

In this case, the High Court rejected the application for a declaratory order on the basis that the applicant was not able to provide SARS with sufficient evidence to substantiate its claim that key management decisions were made in Mauritius.

SARS Interpretation Note 6

SARS provides guidance on how to interpret and establish the POEM of juristic persons, with its Interpretation Note: No.6 (Issue 2) dated 3 November 2015 (New Interpretation Note). The New Interpretation Note provides that the POEM of a company is the place where key management and commercial decisions that are necessary for the conduct of business as a whole are in substance made. This approach differs quite sign

  • the POEM was the place where the company is managed on a regular or day-to-day basis by directors or senior managers of the company, irrespective of where the overriding control is exercised or where the board meets; and
  • the management by directors or senior managers refers to the implementation and execution of policy and strategic decisions made by the board, and the POEM can also be referred to as the place of implementation of the entity's vision.

The New Interpretation Note confirms that the POEM is the place where strategic decisions are taken or adopted, as opposed to the place where strategic decisions and policies are executed and implemented. This approach is consistent with the OECD Model Tax Convention and its accompanying commentary.

The New Interpretation Note underlines certain facts and circumstances to be taken into account when determining the POEM of an entity. In the succeeding paragraphs, we list some of these facts and circumstances.

  • The place where the company's head office is located and where senior management and their support staff are predominantly located is often the place where key management decisions are made. Where members of senior management operate from different locations, the head office is likely to be the place where the highest level of management is located. Where management is so decentralised that it is impossible to determine the company's head office with a reasonable degree of certainty, the location of the company's head office would be of less relevance in determining the POEM.
  • Decisions taken by shareholders of a company generally affect the existence of a company as opposed to its business. These decisions are therefore not relevant in determining the POEM of a company. However, they can become relevant where the shareholder usurps the power of a director and influences the POEM. This consideration usually becomes relevant where a company is wholly owned by one shareholder, and such a shareholder usurps the directors' role of managing the company.
  • The place where the company's board has chosen to delegate some or all of its authority to a committee, and the place where such a committee is based, will often be the POEM. The nature of the delegation must be taken into account, and whether or not key management decisions have been delegated. If the board delegates its authority to senior management, the place where those senior managers are located will often be the POEM.
  • The place where the board meets is an important factor in determining the POEM, depending on the role the board has in key management and taking key commercial decisions. The physical location of a board meeting may not be the place where key commercial decisions are in substance made, when considering the advances of technology and video conferencing tools used in business today. Considerations of who joined the conference and who was physically present should be factored in along with the location of such board meetings to determine the POEM of an entity.
  • Operational management decisions (day-to-day business operations) should be distinguished from broader top level management decisions, with the latter being a key consideration in establishing the POEM.
  • Managers in charge of centralised support functions such as human resources, data management, customer support or accounting are often located in countries with superior infrastructure. These locations are often separate from where senior managers are located or where a company's head office is located. Although these services are essential to the company, the managers in charge are not involved in key management and commercial decisions of the business as a whole, and therefore their location would be of limited significance in the consideration of the POEM.


The New Interpretation Note gives taxpayers reassurance of a unified interpretation of the POEM that is used by both SARS and our courts. Although the New Interpretation Note provides some guidance on the interpretation that should be followed, the facts and circumstances should be considered on a case-by-case basis. With technological advancements, the increase in influx of multinational corporate investments and operations, and the decentralised approach that these multinationals adopt in conducting their business, establishing the POEM of an entity remains a complex balancing activity that is likely to evolve and be disputed in our courts in the future.

The author acknowledges and thanks Aabeed Abdullatief for his contribution to the writing of this article.


1. Definition of "gross income" in section 1.

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