Residence revisited

• Author: Aude Delechat,Liesl Fichardt
• Date: 01 September 2010
• DOI: 10.10520/EJC174674
• Pages: 1-13
• Published date: 01 September 2010

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Residence Revisited

LIESL FICHARDT1 & AUDE DELECHAT2

ABSTRACT

The purpose of this article is to explore the issue of corporate tax residence

for South African businesses which are established or managed in more than

one jurisdiction. As a starting point the article explores the tests for corporate

residence in South Africa and the United Kingdom respectively. It then deals

with the issue of dual residence, possible double taxation and the tie-breaker

provisions of a double-taxation agreement, which contains its own concept

of residence.

The article highlights the differences in the tests for residence under the

national laws of South Africa and those in the UK. The South African test of

‘effective management’ has not been considered by the South African courts,

but the South African Revenue Service has provided some guidance to inter-

pretation. In the UK the test is whether the company is ‘centrally managed

and controlled’ in that country. Case law has developed a useful precedent to

consider against the guidance given by HM Revenue and Customs. In respect

of dual residence, the article reviews the relevant SA–UK double-taxation

agreement and its tie-breaker provisions, and considers recent UK case law on

the interpretation of the concept of ‘place of effective management’, which is

usually found in the UK double-taxation agreements.

Finally, thought is given to how South African companies should take care

to protect themselves from attracting residence status in another jurisdic-

tion where they do not wish to be taxed, or in a jurisdiction where double

taxation may result with no means of relief. Consideration is also given to

practical steps to prevent residence and tax liability in the UK, for companies

conducting their affairs in that country.

INTRODUCTION

The global economic environment offers increasingly attractive opportuni-

ties for many South African companies to carry out activities in other coun-

tries. Some of them are already established or managed in more than one

jurisdiction. As a result, more than one tax authority may stake its claim to

tax a share of corporate prof‌its and gains, where the company is considered

to be a tax resident of those jurisdictions.

Where there is a possibility of the company being resident in two states

— dual residence with a risk of double taxation — the tie-breaker provisions

1

Liesl Fichardt is a tax partner of Berwin Leighton Paisner LLP, London, UK. She is

a South African advocate and is dual-qualif‌ied as solicitor and solicitor-advocate in

England and Wales.

2

Aude Delechat is an associate in the tax team of Berwin Leighton Paisner LLP,

London, UK. She is qualif‌ied as a solicitor in Canada (Quebec).

2Volume 1 • Issue 3 • september 2010

Business Tax & Company Law Quarterly

© SIBER INK

of a double-taxation agreement (DTA) between those states may help deter-

mine which f‌iscal authority is entitled to tax, and provide some relief from

double taxation. Crucially, the term ‘residence’ has no uniform meaning in

the domestic legislation of different states or internationally, and this has

resulted in uncertainty and litigation in many countries, including the UK.

The purpose of this article is to revisit the test for corporate residence.

We f‌irst consider the domestic test for residence under South African tax

legislation and under the legislation in the UK, a popular trading desti-

nation and business partner for many South African companies. In the

UK, recent case law suggests a ref‌ined domestic def‌inition of ‘residence’,

given the global and developing technological environment within which

companies do their business. We then consider the issue of dual residence

and the test for residence in the South Africa–United Kingdom DTA, and

its implications for companies, in particular in the light of recent case law

in the UK on the tie-breaker provisions in its DTAs.

THE IMPORTANCE OF RESIDENCE IN THE FISCAL CONTEXT

If a company operates or plans to operate in more than one jurisdiction, it

is essential for it to consider the implications of tax residence to ensure the

most eff‌icient and favourable tax consequences and, importantly, to avoid

double taxation.

In most jurisdictions, residence of companies and individuals in the

state concerned triggers liability to tax in that state. Domestic tax provi-

sions are not uniform, and where the concept of residence is def‌ined in

national law, different def‌initions and concepts may be used in different

countries. This can cause confusion. If the term is not def‌ined clearly or at

all, the room for confusion is even greater. In the case of companies, the

def‌inition of ‘residence’ may include ‘place of effective management’ (as in

South Africa), ‘central management and control’ (as in the UK) or ‘place of

management’ (as in Switzerland).

Even when similar concepts are used by domestic legislators in different

states, individual f‌iscal authorities attribute different meanings to terms

which may, at face value, appear to be the same.

If a company is regarded as tax resident in a jurisdiction, the relevant

local authorities are likely to claim tax on corporate prof‌its and capital

gains. This can be a fairly simple exercise if the claim is made by only one

tax authority. However, if the company is regarded as resident in more

than one jurisdiction, each f‌iscal authority, applying its own test, can claim

tax, and a conf‌lict regarding double taxation may arise, in particular as to

whether double-tax relief is available.

If no DTA between the relevant states exists, there is a risk of double

taxation and no relief. If there is a DTA, double-tax relief may well be avail-

able. The provisions of the DTA do not serve to alter the basis of taxation