,MTX5904 EXAM 2026 - COMPLETE ANSWERS
, QUESTION 1
A) Relevance of the Place of Effective Management (POEM) in Determining Tax
Residence of Handy Inc
Introduction
The determination of a company’s tax residence is fundamental in establishing
its liability to income tax in South Africa. In the case of Handy Inc, the key issue
is whether the company is regarded as a South African tax resident or a resident
of the United States. This requires an analysis of the place of effective
management (POEM) under the South African Income Tax Act 58 of 1962,
relevant South African case law, the OECD Model Tax Convention, and the South
Africa–United States Double Taxation Agreement (DTA).
South African Income Tax Act and Corporate Tax Residence
Section 1 of the Income Tax Act 58 of 1962 defines a “resident” in relation to a
company as one that is either:
Incorporated in South Africa, or
Has its place of effective management in South Africa (Income Tax Act, s 1).
Since Handy Inc is presumably incorporated outside South Africa, its tax
residence hinges on whether its POEM is located in South Africa. If so, Handy Inc
would be regarded as a South African tax resident and subject to tax on its
worldwide income.
Meaning and Interpretation of Place of Effective Management
South African courts have consistently interpreted POEM as the place where key
management and commercial decisions necessary for the conduct of the entity’s
business as a whole are made.
In Commissioner for SARS v Tradehold Ltd (2012), the Supreme Court of Appeal
held that POEM is the place where the company is “managed on a day-to-day
basis at a high level,” and not merely where formal board meetings are held
(Tradehold case).
This approach was reinforced by SARS Interpretation Note 6 (Issue 2), which
states that POEM is the place where strategic decisions are implemented rather
than where they are formally recorded.
Accordingly, if Handy Inc’s senior executives operate from South Africa and
exercise real decision-making authority there, its POEM may be regarded as
South African-based.
, QUESTION 1
A) Relevance of the Place of Effective Management (POEM) in Determining Tax
Residence of Handy Inc
Introduction
The determination of a company’s tax residence is fundamental in establishing
its liability to income tax in South Africa. In the case of Handy Inc, the key issue
is whether the company is regarded as a South African tax resident or a resident
of the United States. This requires an analysis of the place of effective
management (POEM) under the South African Income Tax Act 58 of 1962,
relevant South African case law, the OECD Model Tax Convention, and the South
Africa–United States Double Taxation Agreement (DTA).
South African Income Tax Act and Corporate Tax Residence
Section 1 of the Income Tax Act 58 of 1962 defines a “resident” in relation to a
company as one that is either:
Incorporated in South Africa, or
Has its place of effective management in South Africa (Income Tax Act, s 1).
Since Handy Inc is presumably incorporated outside South Africa, its tax
residence hinges on whether its POEM is located in South Africa. If so, Handy Inc
would be regarded as a South African tax resident and subject to tax on its
worldwide income.
Meaning and Interpretation of Place of Effective Management
South African courts have consistently interpreted POEM as the place where key
management and commercial decisions necessary for the conduct of the entity’s
business as a whole are made.
In Commissioner for SARS v Tradehold Ltd (2012), the Supreme Court of Appeal
held that POEM is the place where the company is “managed on a day-to-day
basis at a high level,” and not merely where formal board meetings are held
(Tradehold case).
This approach was reinforced by SARS Interpretation Note 6 (Issue 2), which
states that POEM is the place where strategic decisions are implemented rather
than where they are formally recorded.
Accordingly, if Handy Inc’s senior executives operate from South Africa and
exercise real decision-making authority there, its POEM may be regarded as
South African-based.
