The resident or non-resident status of a taxpayer

The Charge to Income Tax – Module 5 was published in the Daliy FT on 20 October.

1Under the Act, a taxpayer’s nationality or domiciliary status is not a relevant tax factor. We have already referred to persons resident in Sri Lanka and persons not so resident. This distinction is important for the effect of the charge under section 2 is different on the former and latter classes of persons. A resident is chargeable to tax on profits and income wherever arising (the global principle), whereas a person not so resident is chargeable to tax on profits and income arising in or derived from Sri Lanka (the source principle).

2In terms of the definitions in section 217, “resident” means resident in Sri Lanka within the meaning of section 79. “Nonresident” or “not resident” means not resident in Sri Lanka within the meaning of section 79. A taxpayer’s resident or non-resident status is fixed by reference to each year of assessment. A year of assessment (Y/A) means the period of 12 months commencing on 1 April of any year and ending on 31 March immediately next.

3Section 79 deals with the criteria of tax residence for individuals and companies.

lAn individual who is physically present in Sri Lanka for183 days or more during any Y/A is treated as resident throughout that Y/A.

lWhere an individual who is treated as resident for two or more consecutive Y/A leaves Sri Lanka and is absent from Sri Lanka without a break for a period of 365 days, he shall be treated as non-resident from the commencement of the Y/A in which he commences his absence. However, in reckoning his unbroken period of absence, periods spent in Sri Lanka totalling not more than 30 days, shall be treated as spent outside Sri Lanka.

lAn individual in the employment of the Government of Sri Lanka who is resident in any other country for the purposes of such employment, is treated as resident in Sri Lanka, if income tax or tax of a similar character is not payable in that country on his official emoluments. If the individual is a citizen of a country other than Sri Lanka, he will be chargeable to income tax in Sri Lanka only on his official emoluments and other income sourced in Sri Lanka.

lAn individual employed on a ship of Sri Lanka (within the meaning of the Merchant Shipping Act) is treated as resident. If such individual is a citizen of a country other than Sri Lanka; he is chargeable to income tax in Sri Lanka only on his employment income.

4A company or “body of persons” is treated as resident in Sri Lanka if its registered or principal office is in Sri Lanka or where the control and management of its business is exercised in Sri Lanka.

Under section 113(1) and (2) of Companies Act No. 07 of 2007, every company shall have a registered office to which all communications and notices may be addressed; the registered office at a particular time is the place that is described in the register as the company’s registered office.

A company’s “principal office” is “its headquarters, or the place where the chief or principal affairs and business of the corporation” – this last word is the American equivalent of company – “are transacted. Usually it is the office where the company’s books are kept, where the meetings of stockholders are held, and where the directors, trustees, or managers assemble to discuss and transact the important general business of the company, but no one of these circumstances is a controlling test…” (Black’s Law Dictionary.)

4.1 Without much dispute, the phrase “control and management” may imply substantially the same thing as “ central management and control” a concept used in English cases. In De Beers Consolidated Mines Ltd. v Howe (5 TC 198) the facts were that the appellant company was registered and incorporated in South Africa; it owned diamond mines in Africa that were worked there; the head office was formally in Kimberly (Africa) and the general meetings were held there; some of the directors and life governors lived in South Africa; directors’ meetings were held in Kimberly as well as in London. “But it is clearly established that the majority of Directors and Life Governors live in England, that the Directors’ Meetings in London are the meetings where the real control is always exercised in practically all the important business of the Company, except the mining operations. …These conclusions of fact cannot be impugned, and it follows that this Company was resident within the UK.” (Per The Lord Chancellor in the HL)

4.2 The De Beers case illustrates the principle that the test of “control and management” can override the tests of registration and incorporation of a company, for the purpose of ascertaining where a company is resident. There seem to be tax planning opportunities for companies incorporated and registered in Sri Lanka, doing a business overseas which is controlled and managed overseas, provided goods for the business are not sourced in Sri Lanka.

4.3 Another case of related interest is Todd v Egyptian Delta Land & Investment Co Ltd (HL, 1928, 14 TC 119). A company registered in the UK and carrying on business in Egypt altered its Articles of Association in order to remove its control and management to Cairo where all the meetings of directors and of the company were held and all books and records were kept. A London secretary was appointed to comply with the requirements of the Companies Acts. In the HL it was held that the company was not resident in the UK.

(The writer, B.Sc – Maths Special, University of Ceylon – 1955, is a Fellow of the Sri Lanka Institute of Taxation and former Deputy Commissioner of Inland Revenue Sri Lanka. He can be reached on 011-2712692.)