SARS Guide on Venture Capital Companies

SARS Guide on Venture Capital Companies

• 18 February 2020
• Corporate Tax
• SARS

Important:

This guide is based on the legislation as at time of issue.

1. Introduction

One of the main challenges facing small and medium-sized businesses, as identified in the 2008 South African National Budget Review, is the difficulty in accessing equity finance. Equity financing is essentially a method used by companies to raise capital by issuing company shares to investors. A share in relation to a company means any unit into which the proprietary interest in the company is divided. The holder of the share does not own the assets of the company, but owns the rights in the company, that is, the right to vote, the right to dividends and the right to capital distributions.

The cost of share investments held on capital account is generally not deductible from income. Section 12J was introduced as a tax incentive to encourage equity investment through VCCs in small and medium-sized businesses and junior mining companies. Section 12J allows a holder of shares to claim a 100% deduction of the cost of the shares issued by the VCC, provided certain requirements are met. The section is effective for venture capital shares acquired on or after 1 July 2009 but on or before 30 June 2021. 

Section 12J has requirements at the level of the VCC and at the level of the “qualifying company” whose shares are held by the VCC. A VCC is taxed as a company and does not enjoy any special tax concessions because of its VCC status.

2. Requirements for a venture capital company

Section 12J(1) defines “venture capital company” as –

“a company that has been approved by the Commissioner in terms of subsection (5) and in respect of which such approval has not been withdrawn in terms of subsection (3A), (3B), (6) or (6A)”.

Under section 12J(5) the Commissioner must approve a VCC if the company has applied for approval and the Commissioner is satisfied that –

• the company is a resident (see 5.1 for information on a “resident”);
• the sole object of the company is the management of investments in qualifying companies;
• the tax affairs of the company are in order and the company has complied with all the relevant provisions of the laws administered by the Commissioner; and
• the company is licensed under section 8(5) of the Financial Advisory and Intermediary Services Act 37 of 2002.

Owing to the sole object requirement, a VCC cannot carry on an active business itself. That is, a VCC cannot, in addition to managing investments in qualifying companies, run another business or manage a trading or long-term investment portfolio in non-VCC investments. For example, a VCC cannot acquire a number of properties for rental purposes. However, if the VCC has excess office space it may rent that excess space to tenants. Whether a VCC is merely renting out excess space or has acquired extra space with the purpose of renting can be determined only on a case-by-case analysis of the investment.

Similarly, although a VCC cannot have a trading or long-term investment portfolio in non-VCC investments, it can invest the funds it receives through the issue of its equity shares in nonVCC investments on a short-term basis before it invests those funds in qualifying companies without transgressing the sole object requirement. The Act does not specify what the funds can be invested in during this interim period. The type of investment and manner of the investment must be in alignment with its sole object of the management of investments in qualifying companies. So, for example, an investment in a non-VCC company without a realistic short-term exit strategy would probably result in a transgression of the sole object requirement. By contrast, an investment in short-term debt instruments or preference shares is likely to be acceptable. However the terms of the specific investment and all the relevant facts will need to be assessed on a case-by-case basis to determine whether the VCC has met or transgressed the sole object requirement.

A VCC may not have any objective, even if it is subsidiary in nature, other than the management of investments in qualifying companies.

Approval as a VCC is granted only on full compliance with all the requirements.

The process of applying for approval involves the submission of a VCC001 form – Venture Capital Company: Application for SARS Approval. The completed form must be emailed to vcc@sars.gov.za or posted to the address provided on the SARS website.

This form must be accompanied by the following documents: 

• A tax compliance status pin to verify that the company’s tax affairs are in order.
• A registration certificate issued by the Companies and Intellectual Property Commission (CIPC).
• A copy of the company’s Memorandum of Incorporation and, if applicable, the Certificate of Confirmation that the amendment of the memorandum of incorporation was accepted by CIPC to confirm that the sole object of the company is the management of investments in qualifying companies.
• A copy of the Financial Sector Conduct Authority licence certifying that the VCC is licensed as a financial service provider.

The application form and documents will be assessed by the Commissioner. A successful applicant will be allocated a VCC reference number and an approval letter will be issued to the applicant. A rejection letter will be issued to an unsuccessful applicant stating the reasons for the rejection.

See 8 for the consequences which may arise if subsequent to obtaining approval as a VCC, a VCC fails to meet any of the requirements discussed above.

This article first appeared on sars.gov.za.

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