South Africa: Venture Capital Companies – Summary Of The Latest Tax Rulings

Last Updated: 8 August 2016
Article by Mansoor Parker and Anuschka Wischnewski

Most Read Contributor in South Africa, September 2016


The venture capital company ("VCC") regime was introduced in 2009, with an aim to encourage investors, by way of substantial tax benefits, to invest in small South African trading companies. VCCs are private investment companies, although they need not be, as the Income Tax Act does not prevent VCCs from listing their shares on the Johannesburg Stock Exchange.

The past two years have seen a phenomenal increase in the number of VCCs. There are now 36 South African Revenue Service ("SARS") approved VCCs, of which 29 were approved in the past two years.

The increase in the number of VCCs has also seen the emergence of VCC-specific advance tax rulings. The advance tax ruling system was introduced in 2006. Its purpose is to promote clarity, consistency, and certainty regarding the interpretation and application of tax legislation. An advance tax ruling is a written statement on how SARS will interpret and apply specific provisions of the applicable tax legislation. SARS publishes redacted versions of these advance tax rulings on its website.

On 11 September 2015, SARS issued binding private ruling 205, which dealt with the meaning of a "controlled group company" and "equity share". More recently, on 15 June 2016, SARS issued BPR 242 which, like BPR 205, also dealt with the meaning of a "controlled group company" and "equity share". However, BPR 242 goes further than BPR 205 in that it also considers the R50-million book value threshold and whether the qualifying company carried on business as a hotel keeper.

The guidance provided by these rulings is important as they deal with the rules governing the type of investments that can be made and the conditions VCCs must satisfy in order to raise funds from investors. In this article, we will deal with three issues that arose from these rulings: the controlled group company concept, the equity share requirement and the book value threshold.

Before dealing with these rulings, we recap the typical venture capital structure:

Controlled group company limitation

The VCC may not invest in a qualifying company if it is a controlled group company in relation to a group of companies. A controlled group company in relation to a group of companies is a company where at least 70% of its shares are held by a controlling group company or by other controlled group companies within the group of companies.

This structure is not permissible as the VCC (controlling group company) holds 70% of the shares in the qualifying company (controlled group company). This structure is not permissible as the other investor (controlling group company) holds 70% of the shares in the qualifying company (controlled group company).

A very simple strategy to avoid the qualifying company becoming a controlled group company in relation to the VCC, is to ensure that the VCC subscribes for less than 70% of the shares in the VCC. But what about situations where the VCC would like to contribute, for example, 85% of the qualifying company's issued share capital? The applicants in BPR 205 and BPR 242 were faced with this problem.

In both BPR 205 and BPR 242, the applicants successfully avoided having the qualifying companies classified as controlled group companies. This was achieved because the qualifying companies issued different classes of shares. In BPR 205, the applicant subscribed for 20% of the qualifying company's issued shares (Class A ordinary shares) at a subscription price equalling 75% of the qualifying company's entire issued share capital. The other investors subscribed for Class B and C ordinary shares, respectively.

In BPR 242, the applicant subscribed for A class ordinary shares and the co-investor subscribed for B class ordinary shares in the qualifying company. The applicant held less than 70% of the total number of shares in issue in the qualifying company, but contributed more than its proportionate share in monetary terms to the qualifying company's share capital.

In BPR 205 and BPR 242, SARS issued rulings that the qualifying company was not a controlled group company in relation to a group of companies despite the fact that the VCC contributed more than its proportionate share in monetary terms to the qualifying company's share capital. These rulings confirm that the test is the number of shares that the VCC holds in the qualifying company, not the VCC's economic interest (i.e. the value of those shares) in the qualifying company. It is possible for classes of shares to be created where the value of those shares are disproportionate to the value of those shares.

Equity share requirement

Where the qualifying company issues different classes of shares, then careful attention must be paid to whether the different classes of shares are equity shares. For instance, assume that a VCC subscribes for 60% of the shares in a qualifying company while two other investors subscribe for the remaining 40% of the shares in the qualifying company. If the shares held by the two investors are not equity shares, then the VCC will, in fact, hold 100% of the equity shares in the qualifying company.

For tax purposes, equity shares are any type of share in a company, excluding any share that, neither as respects dividends nor as respects returns of capital, carries any right to participate beyond a specified amount in a distribution. Thus, the equity share definition excludes certain types of shares. The rationale for excluding these types of shares is that they have more features in common with a debt instrument, and are therefore a "safer" form of investment.

The words "any right" imply that a shareholder must be restricted from participating in distributions from a qualifying company in all respects in that there must be a restriction on both the right to a dividend distribution and a capital distribution before the share will not be an equity share. Put differently, if a shareholder is entitled to unlimited participation in any company distributions (whether dividends or returns of capital), the share will constitute an equity share.

In BPR 205:

  • As the applicant contributed a disproportionate amount of share capital, the Class A ordinary shares were entitled to a first distribution of profits or capital equal to the capital invested and a return to the equivalent of prime plus 2%.
  • Upon settlement of the Class A ordinary shares, the Class B and Class C ordinary shares subscribed for by Company A and Investor B, respectively, will be entitled to a second distribution of profits or capital equal to a return to the equivalent of prime plus 2%, paid in proportion to their respective shareholding.
  • Thereafter, the Class A, B and C ordinary shares will rank pari passu in all respects.

In BPR 242, the A and B class shares will carry the following distribution rights:

  • The A class shares will be entitled to a profit distribution on an annual basis in an amount equal to the guaranteed earnings before interest, taxes, depreciation and amortisation, less any third party debt payments.
  • The B class shares will be entitled to a distribution of the remaining profits on an annual basis.
  • On exit, the holders of the A and B class shares will be entitled to a return of capital distribution of their respective amounts contributed together with a cumulative compound annual return linked to prime, with the A class shares ranking ahead of the B class shares.
  • The A and B class shares will then participate in the remaining assets of the qualifying company on a pari passu basis, pro rata to their number of shares held. The B class shares may receive, as a distribution in specie, the common areas in lieu of the cash distribution.
  • These rulings confirm that a class of shares can still be preferential in nature, without losing their "equityness". It is possible to structure a particular class of shares so that the shares carry preferential rights to dividends. The VCC was clearly better off than the holders of the other classes of shares who have to wait in the queue. But in spite of the preferential nature of the VCC's holdings, the shares held by the VCC remain equity shares by virtue of the equity share definition.

The R50-million book value threshold

The R50-million book value threshold applies to all qualifying companies (other than junior mining companies) where the book value threshold is increased to R50-million. The legislation requires the qualifying company's assets to be valued at book value not market value. The book value determination must be made at the time the VCC acquires the equity shares in the qualifying company.

Book value is the price that the qualifying company paid for its assets. It differs from market value, which is the price at which the qualifying company could sell its assets. The book value determination is based on the original cost of the qualifying company's assets less any depreciation, amortisation or impairment costs made against its asset. In many cases, the carrying value of the qualifying company's assets and their market value will differ greatly.

Provided that the book value threshold is satisfied at the time the VCC subscribes for the shares in the qualifying company, any subsequent increase in the book value of the qualifying company's assets will not impact the VCC's tax status. In BPR 242, the qualifying company will acquire sectional title units in two tranches. The combined value of the sectional title units will exceed R50-million which, on the face of it, suggests that the qualifying company will not comply with the R50-million book value threshold.

However, in the first tranche, the qualifying company will use the cash proceeds from the share issue to the VCC to acquire sectional title units with a value below R50-million. Thereafter, the qualifying company will obtain debt funding to acquire additional sectional title units. At the time of the VCC's investment, the qualifying company's book value will be below R50-million despite the fact that it has an option to acquire additional sectional title units. The qualifying company's later purchase of the additional sectional title units does not taint the VCC's initial share subscription in the qualifying company.

SARS ruled that the existence of the option granted to the qualifying company to acquire additional sectional title units will not constitute non-compliance with the R50-million book value threshold nor will the exercise of the option after the acquisition of the first sectional titles constitute non-compliance with the R50-million book value threshold.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.