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Investment by a venture capital company

Friday, 30 June 2017   (0 Comments)
Posted by: Author: Gigi Nyanin
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Author: Gigi Nyanin (CDH)

The South African Revenue Service (SARS) released Binding Private Ruling 274 (BPR 274) on 6 June 2017, which deals with the investment by a venture capital company (VCC) in a company providing and expanding plants for the generation of solar electricity.  

By way of background, the VCC tax regime was introduced into the Income Tax Act, No 58 of 1962 (Act) in 2009 to encourage investment into small and medium-sized enterprises and junior mining companies. The relevant legislation, which is found in s12J of the Act, provides for the formation of an investment holding company, described as a VCC. Investors subscribe for shares in the VCC and claim an income tax deduction for the subscription price incurred. The VCC, in turn, invests in “qualifying companies” (ie investee companies). 

Recent legislative amendments to s12J have given rise to an increased participation in the asset class and use of the investment vehicle, evidenced by the increasing number of binding private rulings that have been issued by SARS in relation thereto. BPR 274, which is discussed in more detail below, is the latest of these rulings. 

Background to the proposed transaction

An operating company incorporated in South Africa and a tax resident of the country (OpCo) has a number of shareholders which are South African individuals (Individuals). The Individuals subscribed for their shares (‘A’ shares) in OpCo and paid nominal subscription prices. The applicant, a South African company that has been approved as a VCC (Applicant), intends to invest in the OpCo, as follows:

 The Applicant will subscribe for ‘B’ class shares (‘B’ shares), which will constitute 20% of the equity shares in OpCo. The ‘B’ shares will entitle the Applicant to:

  • receive an aggregate amount of distributions that will result in the Applicant receiving an aggregate amount equal to the subscription amount, plus a cumulative nominal monthly return; and
  •  dividends which must be paid regularly out of excess or free cash. In this regard, the Individuals will not, unless otherwise determined unanimously by the board of directors of OpCo, be entitled to receive any dividends or distributions until the Applicant has received the total return as described above.

t is important to note that the terms of the ‘B’ shares also provide that, notwithstanding the number of ‘A’ and ‘B’ shares in issue, such shares will carry 50% of the total voting rights, until the Applicant has received the full return. Following this, the ‘A’ and ‘B’ shares will rank pari passu in all respects and carry a single vote each. 

As part of its business operations, OpCo will acquire an existing solar services agreement (SSA) from a partnership (Partnership) which has the Individuals as limited partners and a South African company as the general partner (Company A). The SSA enables the “provision, maintenance, and expansion of solar electricity at the sites of its customer”.

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