Taxation in South Africa: Does it even matter where my company is registered?

Taxation in South Africa: Does it even matter where my company is registered?

“I don’t want to pay tax in South Africa. I have therefore registered a company in Delaware (or the UK or Mauritius or wherever). So I won’t pay tax in South Africa, right?”

Right…

Clients have asked us this question so many times. And strangely enough, they come to us for advice, but once we have listened to the story and conclude that the company will indeed pay tax in South Africa, it is as if they simply cannot believe it.

A lot has been written on the taxation of offshore registered companies in South Africa. The so called Place of Effective Management of a company, or POEM principle, is nothing new. And yet, there is a common misunderstanding around what it actually means practically.

Let’s start with the basics on taxation in South Africa. South Africa applies a residency tax regime, meaning that if you are a South African (tax) resident, SARS can tax you in South Africa.

When will a company be (tax) resident in South Africa? A company will be tax resident in South Africa in one of two scenarios:

  1. It is incorporated in South Africa (your typical (Pty) Ltd incorporated through CIPC); or
  2. It has its POEM (place of effective management) in South Africa.

It is the second scenario that is causing the headache for so many clients.

Let’s unpack the principle in a bit more detail. A company registered in an offshore country can still be taxed in South Africa, if its POEM is in fact in South Africa. From a SARS point of view it therefore does not matter that your company is registered in Delaware, the UK, Mauritius, or wherever. If the POEM is South Africa, SARS can tax. Note, however, that the offshore country may also be able to tax, and this is where Double Taxation Agreements become relevant, but more on this topic in a later article.

It is also important to understand that the foreign incorporated company bears the onus to prove where the POEM is, meaning that if your company wants to claim POEM in a foreign country, the company must prove this on the facts of the matter.

Now for the big question: when will the POEM be considered South Africa?

As is often the case with tax, the answer is not always clearcut. For starters, our Income Tax Act does not define what POEM means. And in terms of local case law, there is little available to guide us through this.

SARS has published what is called an Interpretation Note to explain how SARS sees the position.

The following considerations are relevant from the available international and local case law:

  • Operating a bank account in the foreign country in the name of the company is not necessarily enough to establish POEM in that country
  • What is meant by effective, is “realistic, positive management” (in the foreign country)
  • POEM is “where the shots are called”
  • POEM is where the “real top level management” takes place
  • There is a difference between key management decisions and day-to-day management decisions. It is the place where the key management decisions are taken, that will indicate the POEM

Modern day technology and operations add to the complexity around determining the POEM of a company. Various factors need to be considered in order to decide whether it is likely for your company to have its POEM recognised in the offshore country or not.

The bottom line remains – incorporating offshore is not enough to establish tax residency in the offshore country.

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