An Overview of Venture Capital Companies
29 May 2014
Posted by: Author: Mansoor Parker
Author: Mansoor Parker (ENSafrica)
Venture capital companies are a tax-favoured investment vehicle.
The venture capital company ("VCC”)
scheme, introduced in 2009, is a tax-based scheme designed to encourage
individual and corporate investors to invest in a range of smaller, higher-risk
trading companies by investing through the VCCs.
Although South Africa has a
well-developed private equity industry, its appetite for start-up, early stage
and seed capital type transactions is low. To meet the challenge of access to
venture capital for small and medium-sized enterprises, government introduced a
tax incentive for individual investors, corporate investors and venture capital
funds in qualifying small enterprises and start-ups. The tax incentive took
effect from 1 July 2009.
Since its inception and
despite amendments in 2011 to enhance its attractiveness, the uptake for this
tax incentive has been very limited. In the 2014 National Budget Review,
Government announced that it will propose one or more of the following
amendments to the venture capital company regime:
- making tax deductions
permanent if investments in the VCC are held for a certain period of time;
- allowing transferability of
tax benefits when investors dispose of their VCC holdings;
- increasing the total asset
limit for qualifying investee companies (i.e. companies in which the VCC may invest)
from R20 million to R50 million, and from R300 million to R500 million in the
case of junior mining companies; and
- waiving capital gains tax on
the disposal of assets by the VCC, and expanding the permitted business forms.
The purpose of this series of
articles is to examine the impact of the VCC tax incentives on the investors,
the VCC itself and the qualifying investee companies. This article will give a
general overview of the VCC scheme while subsequent articles will deal with
each of the role players in increasing levels of detail.
What is a VCC?
An approved VCC is a company
designed to provide individual and corporate investors with access to a range
of trading companies which have the potential for growth. The VCC aims to make
money by investing in these smaller trading companies. The VCC raises funds by
issuing equity shares to investors and the money is then allocated to those
businesses that the managers judge to have the best prospects.
Overview of the tax treatment
Upfront income tax relief:
An investor which subscribes
for VCC shares receives an immediate tax deduction equal to 100% of the amount
invested with no annual limit or lifetime limit. The relief is available
provided that the investor subscribes for equity shares, as opposed to buying
them second hand from other investors. There is no minimum holding period.
The upfront income tax relief
is temporary. According to the 2014 National Budget Review a proposal will be
considered making the deduction permanent if the VCC shares are held for a
certain period of time.
No dividends tax relief
Dividends on VCC shares are
subject to the 15% dividends tax unless the investor qualifies for an existing
dividend tax exemption. For instance, investors which are SA resident companies
will enjoy the company-to-company dividend tax exemption.
No capital gains tax relief
CGT is payable when investors
sell their VCC shares at the rate applicable to the relevant investor (13.3%
for individual investors; 18.6% for corporate investors and effective 26.6%for
investors which are trusts). However, there is tax relief for capital losses.
Capital losses on the disposal of VCC shares can be set off against investors’
capital gains. It is not possible to set off capital losses against the
No reinvestment relief
It is not possible for an
investor to defer the gain on another investment by applying the sale proceeds
to subscribe for VCC shares. Thus, investors that sell their, say, Sasol or MTN
shares in order to reinvest the proceeds in VCC shares will be subject to CGT
on the sale of the Sasol or MTN shares. The after-tax proceeds from the sale of
those shares will be invested in VCC shares.
The venture capital scheme is temporary
The VCC regime, introduced in
2009 is subject to a 12 year sunset period that ends on 30 June 2021. The
upfront income tax relief will only apply to VCC shares acquired on or before
30 June 2021.