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South Africa: Tax proposals affecting investors in venture capital (VC) companies

South Africa: Tax proposals affecting investors

Legislation would make changes that could affect investors in venture capital (VC) companies.

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The 2019 Taxation Laws Amendment Bill, released 30 October 2019, includes amendments to section 12J of the Income Tax Act. Therefore, investors need to be mindful of these changes when considering section 12J investments. 

Limitation of VC shares deduction

One proposed amendment to section 12J would introduce a cap in respect of the allowable section 12J deduction. Allowable deductions in respect of VC company shares acquired on or after 21 July 2019 would be capped at R5 million per annum for companies and R2.5 million per annum for all other taxpayers. Thus, an individual investing in a VC company would be limited to deducting R2.5 million in any given tax year.

Section 12J deductions claimed by taxpayers in prior periods have far exceeded the amounts anticipated by National Treasury. The deduction limits are being proposed to narrow the incentive and protect public revenues.

A concern has been raised by an industry association that the limit would require VC companies to change their business models. It has been asserted that the cap would increase the number of investors required, making fundraising more difficult and costly.

Prohibition of VC shares deduction

Section 12J(3A) was amended by tax law in 2016 to provide that no section 12J deductions are permitted in respect of shares issued by a VC company, if after 36 months from the first issue of shares, any shareholder is a “connected person” to that VC company.

The current legislative proposal would provide that this amendment would now only be effective 21 July 2019 and would only apply to taxpayers to whom the VC company has issued shares for the first time on or after 21 July 2019.

In addition, the 2018 tax legislation introduced section 12J(3B) (effective 24 October 2018) to provide for the disallowance of any deduction in respect of the expenditure incurred by the taxpayer in acquiring a particular class of VC shares, if after a period of 36 months from when the taxpayer first acquired the shares, the taxpayer holds more than 20% of the shares in that class. The current legislative proposal provides that this amendment would now only be effective 21 July 2019 and would only apply in respect of any shares issued on or after that date.

The effective dates of these amendments have been deferred to 21 July 2019 (in alignment with the introduction of the deduction limits) in order to mitigate any non-compliance risk for current VC companies in respect of sections 12J(3A) and (3B) as a result of the 2019 legislative amendments.

In addition, section 12J(6A) would also be amended by the current legislative proposal. This section provides for a “review” of the investments made by a VC company after a 36-month period to provide that at least 80% of the expenditure incurred by the VC has been used to acquire shares in companies with certain maximum asset values and to determine that no more than 20% of such expenditure has been invested in any one qualifying company.  The pending amendment provides that this review would only take place after 48 months.


Read a December 2019 report [PDF 88 KB] prepared by the KPMG member firm in South Africa

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