Incorporating a Company in Dubai brings with it huge opportunities. The benefits are immense as you gain access to one of the most vibrant economies of the world, excellent infrastructure, the ability to serve numerous markets as Dubai is regionally very well positioned, access to stable foreign currencies, residency permits for directors and employees, and many many more.
So, you go for it. You take the leap and you set up a company in Dubai. The only problem is that you do not want to relocate to Dubai and you will effectively operate and manage your Company in Dubai from South Africa or your home country wherever this may be. Yes you will fly, yes you will visit other regions but ultimately your business is set up in such a way that you can service clients online and from South Africa.
The ability for companies to set up offshore structures has been eased over the past decade as international trade and the ability to conduct business in various jurisdictions have become much more accessible. What has however become much more difficult is to not fall foul of taxation legislation, anti-avoidance measures, and proving that the companies Place of Effective Management (POEM) are not in South Africa.
You see the thing is, it does not matter where or how you have set up your structure if SARS can prove that you have a Place of Effective Management in South Africa your structure (or company) will be subject to taxes in South Africa. Yes, you heard (read) correctly, you will be taxed in South Africa.
Before we even touch on the issues pertaining to POEM let’s consider the Economic Substance Regulations (ESR) which has been legislated in Dubai. Each region or country has its very own requirements which are in many cases fairly similar to POEM. Requirements in other regions are in some instances a check box approach whereas in others they mimic the substance over form ideology as is found in POEM.
The ESR in Dubai classifies your business into 9 categories. Falling in either of these categories places a requirement on the company to prove that it is economically active and can prove substance in the region. Not being able to adhere to the substance requirements will result in the exchange of information with a competent foreign authority, such as South Africa.
Irrespective of whether or not you meet the requirements of ESR in Dubai from a South Africa perspective you will have to evaluate where the company’s POEM is situated.
The application of POEM on your business
The application of POEM requires that substance over legal form be applied in considering where your offshore company is being directed from. Should the application of POEM indicate that South Africa is where you are managing your offshore company from then your company will have to be taxed in South Africa notwithstanding the fact that it has been incorporated in another jurisdiction.
Let’s now consider how to evaluate whether your offshore company is potentially liable for taxes in South Africa.
Residence for a company
A person other than a natural person is a “resident” as defined if such person:
- is incorporated, established, or formed in the Republic; or
- has its place of effective management in the Republic.
The definition excludes any person that is deemed to be exclusively a resident of another country for purposes of the application of any tax treaty.
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.
From the definition of being a Resident in South Africa, it is therefore clear that if a foreign Company has a POEM in South Africa it will be considered a Resident and be subject to the laws of taxation in the country.
General principles for Place of Effective Management
The South African Revenue Services (SARS) has issued interpretation note 6 (issue 2) which deals with the Place of Effective Management for Companies. This interpretation note provides guidance in determining the POEM and can unfortunately not be seen as being exhaustive in dealing with this matter.
In general, a company’s place of effective management is the place where key management and commercial decisions that are necessary for the conduct of its business as a whole are in substance made.
There are normally multiple facts that need to be taken into account, often involving multiple locations, and from those facts and locations, it is necessary to determine a single dominant place where effective management is located. The determination looks at where the key management and commercial decisions are regularly and predominantly made. It is not a snapshot requiring an assessment at a particular moment in time.
Definitive rules cannot be laid down in determining the place of effective management and all relevant facts and circumstances must be examined on a case-by-case basis.
Some general principles to consider as outlines by the interpretation note includes (in some instances it is copied verbatim from the interpretation note):
The location of a company’s head office, being the place where a company’s senior management and their support staff are predominantly located, is generally a major factor in the determination of a company’s place of effective management because it often represents the place where key company decisions are made.
Members of senior management may operate from different locations on a more or less permanent basis. In these situations, the members may participate in meetings via telephone or video conferencing rather than by being physically present at meetings in a principal location. In these situations, the head office would normally be the location, if any, where the highest level of management (for example, the Managing Director and Financial Director) and their direct support staff are located.
Head office is most probably the strongest indicator of POEM.
Delegation of authority
The board may delegate some of its authority to committees. These committees may approve or affect the decisions. This does not take away from the fact that the board has ultimately steering power over the company.
The location where a company’s board regularly meets and makes decisions may often be the company’s place of effective management provided the board retains and exercises its authority to govern the company and does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole.
There is, however, no assumption that a company’s place of effective management must be where its board meets.
Modernization and global travel
Changes in telecommunications, information technology, global travel, and modern business practices can impact the place of effective management assessment. Consequently, what initially appears to be the location where the decisions are made, that is, the physical location of the board meeting, may not be where the key management and commercial decisions are in substance being made.
Shareholding does not usually influence POEM. There is a distinction between shareholder guidance or influence and usurpation. Influence does not constitute effective management but the undue influence may do so.
Legal factors such as a company’s place of incorporation, formation or establishment, the location of its registered office, and the location of its public officer are generally not relevant in the determination of a company’s place of effective management.
The extent of a company’s economic nexus with a country is generally irrelevant in the determination of its place of effective management.
Application of POEM on your business
The application and implication of POEM are profound. Should this be applicable to you or your business the effect is bound to be materially adverse.