Most Read Contributor in South Africa, September 2016
Welcome boost for smaller private equity investments
The Venture Capital Company ("VCC")
tax regime is regulated by section 12J of the Income Tax Act, 58 of
1962 which was first introduced 2009 in order to encourage
investments into privately owned businesses. The section
specifically aims to help the growth of small and medium sized
businesses by increasing their access to equity finance.
There are a number of requirements which must be complied with
before a VCC may obtain approval from South African Revenue Service
("SARS") and qualify for the favourable
tax regime. For example, it must be resident, its sole object must
be the management of investments of qualifying companies as
defined, its tax affairs must be in order and it must be licensed
in terms of section 7 of the Financial Advisory and Intermediary
Services Act, 2002.
The investments by the approved VCC also needs to be structured
in a certain way. The approved VCC is firstly required to hold
qualifying shares which are shares issued by a qualifying company,
as defined. A "qualifying company" is defined to be a
resident with its tax affairs in order, that is unlisted or a
junior mining company and not carrying on an impermissible trade. A
qualifying company's investment income is limited to 20% of its
gross income. The regime is therefore essentially aimed at direct
investment in operational entities.
Further limitations in relation to the investment include that
no more than 20% of the expenditure incurred by the approved VCC
can be used to acquire shares in any one qualifying company (i.e.
the VCC will need to own at least 5 investments) and at least 80%
of the expenditure incurred by the approved VCC must be to acquire
qualifying shares in qualifying companies having assets with a book
value not exceeding R300 million for a junior mining company or R20
million for other companies. If all of the qualifying criteria are
met, an investor will be allowed to deduct the expenditure incurred
in acquiring shares in a VCC from its taxable income, creating a
sizable incentive to invest. Continued compliance with the
requirements will require careful management but the tax incentive
effectively means that a VCC will get the return on 100% of the
investment for 60% of the cost.
There has however been a limited uptake and approximately only
10 VCC companies were approved to date. One of the main reasons for
the limited interest was as a result of the fact that the original
qualifying asset limitation criteria set at R300 million for junior
mining companies and R20 million for other companies were too
The SARS has recognised these limitations and the Taxation Laws
Amendment Act of 2014 (the "Amendment
Act") has favourably improved section 12J of the Act.
The most significant of these proposed changes are the increase in
the abovementioned book value limit to R500 million for a junior
mining company and R50 million for other companies. The amendments
also provides that the deduction to a taxpayer for the expenditure
incurred in acquiring shares in a VCC will no longer be recouped
and taxable where the taxpayer sells the shares provided the
taxpayer held the shares for a period longer than five years. The
amendments will come into effect on 1 April 2015
These amendments have been welcomed by the private equity
industry and is expected to have a positive effect on the economy
by ensuring greater investments into small businesses and junior
mining companies, which will stimulate job creation and economic
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
In response to information provided by FIRS, NSE has sent letters to publicly listed companies, who were purportedly identified by FIRS as non-compliant.
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