UNDERSTANDING SECTION 12J VCC
The investee must be a company.
The company must be a resident.
The company must not be a controlled group company in relation to a group of companies.
The company’s tax affairs must be in order (a tax clearance certificate must be provided to SARS.)
The company must not be listed in terms of Section 41.
During any year of assessment, after 36 months after first issue of a share to a Venture Capital Company, the sum of the “Investment income” derived by the company must not exceed 20% of its gross income for that year of assessment.
During any year of assessment, after 36 months after first issue of a share to a Venture Capital Company, not more than 50% of the aggregate income from carrying of any trade, was derived from a shareholder of the VCC, directly or indirectly.
The company must not carry on any of the following impermissible trades:
- Any trade carried on in respect of immovable property, except trade as a hotel keeper (includes bed and breakfast establishments)
- Financial service activities such as banking, insurance, money-lending and hire purchase financing
- Provision of financial or advisory services, including legal, tax advisory, stock broking, management consulting, auditing, or accounting
- Operating casino’s or other gambling related activities including any other games of chance
- Manufacturing, buying or selling liquor, tobacco products or arms or ammunition; or
- Any trade carried on mainly outside the Republic
No person who holds shares in the VCC has more than 50% participation or voting rights in the investee company. The investee company was not acquired from a person who holds shares in the VCC.
Any South African registered taxpayer qualifies to invest in an approved Venture Capital Company.
Where any loan or credit is used to finance the expenditure in acquiring a Venture Capital share and remains owing at the end of the year of assessment, the deduction is limited to the amount for which the taxpayer is deemed to be at risk on the last day of the year of assessment.
A deduction will be recouped in the taxpayer’s hands where the taxpayer is a connected person (i.e. someone holding more than 20% of a class of share) of the Venture Capital Company after 36 months from first issue of a VCC share.
On request from SARS, the investor must verify a claim for a deduction by providing a Venture Capital Company investor certificate that has been issued by an approved Venture Capital Company, stating the amount of the investment and the year of assessment in which the investment was made.
The taxpayer must hold the shares in the VCC for period of 5 years for the their tax deduction to be permanent. The deduction is recouped (recovered) if the taxpayer disposes of the Venture Capital shares prior to the end of the 5 year period to the extent of the initial Venture Capital Company investment (under the general recoupment rules of section 8(4) of the Act.)
Standard income tax and CGT rules apply in respect of disposal of Venture Capital Company shares.
The full amount invested in a Section 12J fund is 100% deductible from an investor’s taxable income in the year in which the investment is made, subject to the regulations in Section 12J of the Tax Act. This applies to individuals, companies, partnerships and trusts. An investor in a Section 12J fund will therefore obtain a 45% tax break (for an individual tax payer at maximum marginal rate) at the time of investment.
If the investment in a Section 12J fund is held for a minimum period of 5 years, the tax benefit conferred at the date of investment will become permanent, i.e. NO recoupment of the tax benefit in the hands of the investor when the investment in a Section 12J fund is subsequently realised.
A Section 12J VCC can invest in companies with book value assets not exceeding R50 million.
The SARS Commissioner must approve a VCC if the:
- Company is a resident;
- Sole object of the company is the management of investments in qualifying companies
- 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;
- Company has an FSP license
The company must satisfy the following requirements by the end of each year of assessment after the expiry of 36 months from the first date of issue of Venture Capital shares:
- A minimum of 80% of the expenditure incurred by the Venture Capital Company to acquire assets must be for shares in Qualifying Companies (Investees)
- Each investee company must, immediately after the issuing of the qualifying shares, hold assets with a book value not exceeding R500m in any junior mining company; or R50m in any other qualifying company
- The expenditure incurred by the Venture Capital Company to acquire qualifying shares in any one Qualifying Company must not exceed 20% of capital raised in the VCC
- A maximum of 69.9% of the equity in a Qualifying Company can be held by the Venture Capital Company
The Venture Capital Company must maintain a record of all its investors and issue valid Tax Certificates to the investors to enable them to complete their tax return.A copy of this record must be submitted to SARS bi-annually and must contain the necessary details required by SARS.
The Venture Capital Company must maintain a record of all its investees. A copy of this record must be submitted to SARS bi-annually and must contain the necessary details required by SARS.