Treasury is incentivising South African taxpayers to invest in the local economy, via a tax deduction on the investment amount, provided the investment is structured through an approved section 12J Venture Capital Company (“VCC”).
The benefit to the investor for making the investment through a VCC, will be an amplified boost to the investor’s return on investment, as the section 12J benefit translates into a discount (through a tax deduction for the investor) of 28% for companies and up to 45% for individuals and trusts, on the investment amount.
A simplified example of the benefit that will be received is if one takes the current tax year to end February, an investor who has a marginal tax rate of 45% would be able to shield R450 000 of tax should they invest R1 million into an approved Section 12J VCC, with the caveat that they must hold the investment for a minimum period of five years. The investment can be offset against all types of taxable income.
A company must meet all of the following preliminary requirements to be able to obtain approval as a VCC:
- The company must be a resident;
- The sole object of the company must be the management of investments in “qualifying companies”;
- The tax affairs of the company must be in order; and
- The company must be licensed in terms of section 7 of the Financial Advisory and Intermediary Services Act, 2002.
An entity would constitute a “qualifying company” if, inter alia:
- it is a resident;
- the company is not a controlled group company in relation to a group of companies;
- the tax affairs of the company are in order;
- the company is an unlisted company or a junior mining company;
- the sum of the investment income derived by that company during any year of assessment does not exceed 20% of the gross income of that company for that year; and
- it does not carry on any of the following “impermissible trades”:
- any trade carried in respect of immovable property, other than a trade carried on as a hotel keeper (i.e. an investment in hotels, serviced apartments, holiday homes in specific estates and student residences may very well comply);
- any trade in the financial services sector (for example, banking, insurance, money lending, hire-purchase arrangements, however, this does not prevent an investor from investing in technology within this sector);
- any trade carried on in respect of financial or advisory services, including trade in respect of legal services, tax advisory services, stock broking services, management consulting services, auditing or accounting services;
- any trade carried on in respect of gambling, liquor, tobacco, arms or ammunition; and
- any trade carried on mainly outside of South Africa.
It should be noted that the Commissioner may withdraw VCC approval in certain circumstances having regard to, for example, the book value of assets held by qualifying companies or the gross asset value of the target company exceeds R50 million immediately post the investment or R500 million in the case of a junior mining company;
Should the above-mentioned requirements be met, there may be an opportunity to take advantage of the Section 12J associated tax benefit.
How to obtain VCC approval?
Email a completed application form together with supporting documents proving that the preliminary requirements have been met to email@example.com (Venture Capital Companies Office) or send by post to:
SARS Legal Counsel
Legal Advisory: Specialist Support
Venture Capital Companies
Private Bag X170
Assistance with the application can be requested by addressing an email to firstname.lastname@example.org.
You will be contacted once your application has been processed. SARS will assess the application to determine if the company meets the preliminary requirements and if the application is successful, a VCC reference number will be given and an approval letter will be sent to the applicant. If the application is not successful, a rejection letter will be sent to the applicant stating the reason(s) for the rejection.