It appears as if interest in making use of the venture capital company tax incentive is increasing. BPR274 deals with an investment by a venture capital company in a solar electricity generation business. The ruling deals with some of the matters that are contentious in the area of VCC investments, as evidenced by a number of earlier rulings on the same aspects of the incentive.
The venture capital company (VCC) tax regime was introduced in 2009. Despite the apparent benefit to investors of being able to deduct the investments made into the VCC, the incentive did not get interest in the market due to practical design concerns and narrow qualifying criteria. The regime appears to have attracted more attention over the past year or two, as is evident from the number of rulings dealing with it. Binding Private Ruling 274 (BPR274) is the latest of these rulings.
Background to the ruling
An approved VCC intends to invest into an operating company (OpCo). Prior to the introduction of the VCC, a group of natural persons acquired the Class A OpCo shares at nominal value.
The VCC will subscribe for Class B OpCo shares. Class B shares will constitute 20% of the equity shares of OpCo (it appears from the ruling that this is based on the actual number of shares issued, as opposed to the amount invested). Class B shareholders will be entitled to a return consisting of the amount invested and a nominal cumulative monthly return. The return will be paid from OpCo's free cash flow. Class A shareholders will not receive any distributions until Class B shares have received these full returns, unless the board unanimously decides otherwise. Class B shares will carry 50% of the total voting rights until the Class B shares have received the full return. Following this, both classes of shares will rank pari passu in all respects.
OpCo will acquire an existing Solar Service Agreement (SSA) from a partnership in which its natural person shareholders are limited partners. The SSA facilitates the provision, maintenance and expansion of solar electricity at its customers' sites. OpCo will acquire the business of conducting a solar facility at specific customer sites in terms of the sales agreement. OpCo intends to engage Company A to develop further generation capacity. The business operations will be outsourced to Company A that built and supplied the new capacity. All assets will be owned by OpCo and leased to the customer in terms of the SSA. Neither the individuals nor Company A is directly or indirectly responsible for OpCo's financing.
Ruling and analysis
Many aspects of the ruling are similar to those covered in earlier rulings. This is a good indication of some contentious areas of the VCC system:
- The VCC may not be a controlling group company in relation to OpCo. The ruling confirms that despite the fact that VCC may contribute more than 70% of the capital in monetary terms, it will not be a controlling group company in relation to OpCo if it holds less than 70% of the total number of shares.
- The VCC must invest in equity shares of OpCo. The ruling states that the Class B shares will be equity shares. It is difficult to establish the exact terms of the dividend yields of the Class B shares from the ruling document.
- OpCo may not carry on a trade in respect of immovable property. The ruling confirms that OpCo's trade is in respect of the solar panels, which constitute movable property.
- OpCo may not derive more than 20% of its gross income from investment income, including rental income. The ruling confirms that the subcont racted service agreement with Company A will not result in OpCo receiving rental income. This is presumably on the basis that OpCo is still responsible for the service towards the client, even though some parts are performed by Company A. (June 2017)
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