Shall I compare POEM to CMC? Though art less lovely and far less temperate.
Many a disappointed searcher has googled “poem” looking for upliftment only to find very un-poetic descriptions of place of effective management. So what is the “place of effective management” anyway, how is it different to “central management and control” and why on earth does it matter?
Well, in most countries, a company’s tax residence, i.e. the test as to whether that country can tax a company, is determined by where it was incorporated (easy enough to ascertain) or where its central management and control (CMC) is. However in South Africa (SA), a company is resident if it is incorporated in SA or if its place of effective management (POEM) is in SA (unless a double tax agreement places the residence of the company exclusively elsewhere, which is a sonnet for another day.)
Basically POEM is much trickier and slippier than CMC, so it’s much easier to inadvertently cause a non-SA entity to become tax resident in SA, than in many other countries. Thanks SARS – blunt thou the lion’s paws, and make the earth devour her own sweet brood; pluck the keen teeth from the fierce tiger’s jaw etc etc.
So, what is CMC?
Imagine a boardroom, filled with serious-looking individuals, making crucial business decisions while sipping lattes – half of Succession’s scenes if you will. Well generally, such decisions are taken at board or similar meetings and these deliberations are where central management and control resides. Different countries have different rules, but in simple terms, if your board meetings are held in Country A, the CMC is there.
So what about POEM?
First we’ll look at SA’s definition of POEM, which is critically important as if your POEM is in SA, the company is tax resident there. Unfortunately, as with many other critically important concepts, the term POEM has not been defined in the SA Income Tax Act, which would be too easy. However, dear old Interpretation Note 6 lays out the SA revenue’s view that a company’s POEM will be where key management and commercial decisions that are necessary for the conduct of its business as a whole are, in substance, made. Clear as mud then.
The interpretation note has long discussions on “real” management and makes a clear distinction between mere board meetings (more relevant for CMC) and actual management, including where senior executive staff actually sit.
Key company decisions are regarded as being made in a company’s head office, so this location will play a great role in determining a company’s POEM. The head office is considered to be the place where the company’s senior management and their support staff are predominantly located. It is possible for a company to have multiple places of management, however it will only have one place of effective management at any given time.
If all key management and commercial decisions affecting the company as a whole are made in one place, then it’s easy, that location will be the company’s POEM. However, if these decisions are made in various locations, the location in which these decisions are primarily or predominantly made will be the company’s POEM.
What happens if you get it wrong?
So, imagine you have a company that is regarded as tax resident in two countries, the country where it was incorporated and the country where it is effectively managed. This is bad news as in theory the company is then subject to two tax regimes at once. Generally a double taxation agreement (DTA) will resolve such a conflict, by what’s snappily called a tie-breaker clause – i.e. ultimate and sole residence will default to the country of POEM. (We note that this POEM is generally the OECD concept which is more akin to where key decisions are actually implemented, but let’s worry about that later.)
However, where there is no DTA in place between the two countries, or where the relevant DTA does not have a tie-breaker clause, we’re in trouble. And the SA/Mauritius DTA does not have a tie-breaker provision, rather. This means both SA and Mauritius could treat a company as being tax resident – for example in Mauritius if the company was established there, and SA if it could be argued that the company is effectively managed from there. In the absence of a tie-breaker, it is left up to the relevant taxation authorities to resolve, and who knows how long that could take!
Shareholders should ensure that their company is effectively managed in its country of incorporation right from the get-go, and exactly how to do this will depend on the precise mechanics of your business. This is not something to get wrong, especially if you’re dealing with Mauritius, or with a country with which SA has no DTA.
If you would like to discuss how this could apply to your company, please contact us.