SARS’ Latest Take On The Meaning Of ‘Place Of Effective Management’

SARS’ Latest Take On The Meaning Of ‘Place Of Effective Management’

By Martin Groenewald, Tax Consultant and Associate Professor David Warneke, Head of Income Tax Technical 


On 30 June 2023 the South African Revenue Service (“SARS”) released an updated version, issue 3, of Interpretation Note 6 (“the Note”), addressing the interpretation and application of the term "place of effective management” (“POEM”) as it applies to companies. This update mainly addresses changes resulting from substantial amendments to Article 4 of the OECD Model Tax Convention (“the MTC”). Although South Africa is not a member of the OECD, the wording of the Convention that pertained at the time the relevant Double Taxation Agreement (“DTA”) was entered into has been utilised in the vast majority of the DTAs to which South Africa is a party.


The previous version of the Note, issued in November 2015, stated that its purpose was to provide guidance on the interpretation of the term POEM when determining the residence of a company in terms of section 1(1) of the Income Tax Act 58 of 1962 (“the Act”). The principles in that version of the Note aligned with the POEM determination when used as a tie-breaker rule in a tax treaty that was based on paragraph 3 of Article 4 of the condensed version of the MTC as at 15 July 2014 and its accompanying Commentary. It is worth noting that POEM was the sole tie-breaker rule in that previous version of the MTC, while the Commentary mentioned an alternative position that was adopted by certain states. The alternative position is similar to the tie-breaker rule now contained in the 2017 version of the MTC.

While the principles and guidelines in Issue 3 of the Note remain consistent with determining POEM according to section 1(1) of the Act, as stated above, the 2017 version of the MTC introduced substantial amendments to Article 4. In particular, the residency of a person other than an individual in cases involving dual residency is, in terms of the revised wording of Article 4, now determined on a case-by-case basis and through mutual agreement by the contracting states and not only on the basis of the entity’s POEM.  This competent authority determination considers various factors, including the POEM, the place of incorporation or where the entity was otherwise constituted, and other relevant elements. Additionally, in the absence of a mutual agreement by the competent authorities, the company will not be entitled to any tax relief or exemption solely based on the place of effective management, but only to such reliefs as agreed by the competent authorities of the states involved. 

Unfortunately, the revised version of the Note creates the misleading impression that the amendments contained in the 2017 version of the MTC and its commentary apply in cases of dual residency to each double tax treaty entered into by South Africa, whether or not the treaty, when concluded, contained the 2017 wording. In our view, the correct position with regard to such treaties is that, in most cases, POEM remains the sole tie-breaker to determine residency. However, in cases where the multi-lateral instrument applies to Article 4 of the treaty, depending on the options elected by South Africa and the other jurisdiction with regard to Article 4, the revised tie-breaker tests may in effect have to be applied as a kind of overlay in cases of dual residency. However, the revised tie-breaker tests will not be applicable to all of South Africa’s double tax treaties and in most cases, will in effect apply only in situations of dual residency.

The meaning of POEM:

The revised version of the Note is in alignment with the previous version insofar as the meaning of POEM is concerned and, in that regard, we have listed the main points below. A new feature is that considerations are provided dealing with impact of COVID-19 on the POEM of a company. 


  • The POEM for a company refers to the location where the key management and commercial decisions necessary for the conduct of its business as a whole are in substance made.
  •  A company may have more than one place of management but can only have a single POEM at any given time. In cases where a company's key management and commercial decisions are made in multiple locations, its POEM will be where those decisions are predominantly or primarily made. 
  • While definitive rules for determining the POEM cannot be prescribed, the Note provides certain factors to consider when assessing a company's POEM and states that the determination of a company’s POEM requires a substance over form approach. The following factors are provided in the Note and serve as a guide – the Note states that a thorough examination of all relevant facts and circumstances is necessary on a case-by-case basis:
    • Head office: The location of a company's head office, where senior management and their support staff are primarily situated, is often where key management decisions are made. However, in cases of very decentralised management, determining the head office's location may be less relevant for POEM determination.
    • Delegation of authority: If a company's board delegates its authority to one or more committees, the location where the members of the committee are based and where the committee develops and formulates the key strategies and policies for mere formal approval by the full board will often be considered the company’s POEM.
    • Board meetings: The location where a company's board regularly convenes and makes decisions may often be its POEM, provided the board retains and exercises its authority to govern the company and substantially makes the essential management and commercial decisions.
    • Modernisation and global travel: Given the use of technology, the physical location of decision-making may not accurately represent where key management and commercial decisions are substantially made. 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 made.
    • Shareholder involvement: Shareholder involvement can cross the line into that of effective management. For example, a shareholder may effectively usurp the powers of the directors of the company. While the influence of shareholders does not constitute effective management, undue influence may do so. The Note further states that situations in which a shareholder or another party usurps effective management will probably be the exception rather than the norm.
    • Operational management versus broader top-level management: Operational decisions are generally of limited relevance in determining a company's POEM compared to key management and commercial decisions, with the latter being the key consideration in establishing the POEM.
    • Legal factors, economic nexus and support functions: These factors are generally of limited relevance to determining the location of a company’s POEM.


The impact of COVID-19:

Regarding the impact of the COVID-19 pandemic on the POEM for companies, the Note confirms that temporary changes in the location of senior executives due to the pandemic are unlikely to alter a company's residence status under a tax treaty. These changes should generally be considered as extraordinary and temporary situations, and the tie-breaker rule contained in tax treaties would continue to apply. However, SARS will carefully consider the merits of each case.


Issue 3 of Interpretation Note 6 maintains its stance on the interpretation and application of the term POEM. The Note emphasises that POEM is determined based on the place where the key management and commercial decisions required for the conduct of the overall business of the company are in substance made. The Note does not lay down definitive practical tests for determination of the POEM in every case but it offers guiding factors, necessitating a case-by-case examination of relevant facts and circumstances. 

Mutual Agreement refers to the Mutual Agreement Procedure (MAP) as referred to in Article 25 of the OECD Model Tax Convention.

The term “Competent Authority” is used in treaties to identify a position, a person or a body within a contracting state or jurisdiction to whom issues can be addressed. The Competent Authority in South Africa is the Commissioner for SARS.