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South Africa: Proposals for caps on tax incentive-related venture capital investments

South Africa: Caps on venture capital investments

Pending legislative proposals would impose caps on the amounts of investments made by natural persons and corporations that would be eligible for tax incentives available under Section 12J.


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Tax benefits under Section 12J

Securing reliable and sustained financing has always been a challenge for small to medium enterprises. Section 12J (introduced in July 2009) was intended to stimulate the economy and to create employment. Potential investors are natural persons, trusts and corporate taxpayers.

Section 12J benefits are also available for non-tax residents.

For Section 12J investments, there is a tax deduction in the tax year in which the investment is made. For example, a taxpayer (a natural person) invests ZAR1 million in a section 12J venture capital (VC) company.  That person will receive 45% (ZAR 450,000) of that investment back in tax in the tax year during which the capital investment was made. This means that, assuming that the taxpayer-investor remains invested for the minimum period, only ZAR 550,000 of the investment remains “at risk.”

  • If the taxpayer-investor withdraws from the investment within five years of the original investment date, the tax deduction claimed in year one must be recouped, and the taxes refunded are repayable to SARS.
  • Minimum investments vary, but can start from ZAR 100,000.
  • A taxpayer-investor is also eligible to receive South African sourced dividend income which is subject to dividend withholding tax but is exempt from income tax.
  • The tax deduction is claimed via the income tax return; thus, the investment does not require an additional tax filing. Many section 12J investments are made in the month in which provisional (estimated) tax payments are paid to the South African Revenue Service (SARS) given that the section 12J investment may be treated as a tax deduction when determining provisional tax liabilities.
  • When a taxpayer disposes of an asset, capital gains tax must be considered. An effective tax rate of 18% applies to taxable capital gains. However, in relation to section 12J share disposals, the value of the base cost of the shares is zero (nil). In other words, the capital gains will be calculated on 100% of the proceeds.
  • Based on current provisions, section 12J deductions will no longer be permitted after 30 June 2021.

Proposal for an investment cap

In July 2019, draft legislation was released and proposed that an investment cap of ZAR 2.5 million per tax year, per taxpayer would apply and would be applicable for all taxpayers (natural persons, trusts and corporations). Currently, there is no investment cap.

During the legislative committee hearings, it was proposed to revise the investment limitation cap for natural persons (ZAR 2.5 million) and for corporations (ZAR 5 million), and that these caps would apply from 21 July 2019.

Read a September 2019 report [PDF 128 KB] prepared by the KPMG member firm in South Africa

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