One of the main challenges to the economic growth of small and medium-sized businesses and junior mining exploration is access to equity finance. To assist these sectors in terms of equity finance, the South African government has implemented a tax incentive for investors in these enterprises through a venture capital company (VCC) regime.
ANE lobbied the South African Minister of Finance for more generous EIS-like tax-based support of entrepreneurship in South Africa. Fundamental to its values, the company wants to foster an eco-system of locally-owned regional technology suppliers that have the capacity to support its highly specialized needs.
One of the main challenges to the economic growth of small and medium-sized businesses and junior mining exploration is access to equity finance. To assist these sectors in terms of equity finance, government has implemented a tax incentive for investors in these enterprises through a venture capital company (VCC) regime.
VCCs are intended to be a marketing vehicle that will attract retail investors. An investor is any taxpayer who qualifies to invest in an approved Venture Capital Company. They have the benefit of bringing together small investors as well as concentrating investment expertise in favour of the small business sector. There are no special tax benefits for VCC, only standard tax rules will apply.
From 2015, the government greatly increased the value of tax deductions to marginal rate of 41% for investors claiming amounts incurred on acquiring VCC shares as a deduction from income. This deduction will not be subject to recoupment if the VCC shares are held for longer than five years.
A company must meet all of the following preliminary requirements to be able to get an approved VCC status for each year of assessment:
The company must be a resident
The sole object of the company must be the management of investments in qualifying companies (i.e. investees)
The company’s tax affairs must be in order
The company must be licensed in terms of section 7 of the Financial Advisory and Intermediary Services Act, 2002
During any year of assessment, after the approval of the Venture Capital Company status, the company must comply with the preliminary requirements as listed above
The VCC regime is subject to a 12-year sunset clause that ends on 30 June 2021.
The company must satisfy the following additional requirements at the end of each year after the expiry of 36 months from the first date of the issue of VCC shares by the VCC:
A minimum of 80% of the expenditure incurred by the VCC to acquire assets must be for qualifying shares
each investee company must, immediately after the issuing of the qualifying shares, hold assets with a book value not exceeding R500 million in any junior mining company; or R50 million in any other qualifying company
The expenditure incurred by the VCC to acquire qualifying shares in any one qualifying company must not exceed 20% of any amounts received by the VCC in respect of the issue of VCC shares
SARS will issue a written notification to the VCC stating the requirements that have not been met and provide a grace period for the VCC to meet the requirements. If the approved VCC does not take the acceptable corrective steps within the period provided for in written notice, the approved VCC status will be withdrawn from – the commencement of that year of assessment, or the date of approval of the Venture Capital Company status where the VCC does not meet the additional requirements after the expiry of 36 months from the date of first issue of VCC shares.
If the approval is withdrawn the VCC must include in its income an amount equivalent to 125 % of the expenditure incurred by investors to acquire VCC shares.