The venture capital company (VCC) tax incentive was introduced in 2008 to assist small and medium entities in raising equity funding. An investor in a VCC can deduct the amount of the investment from his taxable income, despite this being a capital investment. The VCC regime contains a set of rules regarding utilisation of the funds by the VCC.
A number of binding private rulings have been issued over the past few years. These rulings are indicative of some of the areas of uncertainty that exist in the VCC regime but also some solutions that may address potential obstacles that the rules pose to VCCs. SARS issued a draft guide on VCCs that provides the current SARS view on a number of contentious matters relating the VCC regime. This article reviews some of the SARS views that stakeholders involved ought to be aware of.
Sole object of the VCC
In order to be approved as a VCC by SARS, SARS should amongst others be satisfied that a company’s sole object is the management of investments in qualifying companies. The draft guide states that the VCC cannot run any another business or manage any trading or long-term investment portfolio in non-VCC investments. It is however not prohibited from renting out excess office space or investing funds in non-VCC investments on a short term basis. The draft guide states that the type of investment and manner of investment must still be aligned with the sole object of the company to manage investments in qualifying company. Whether this is the case should be assessed on a case-by-case basis; this is likely where some some uncertainty could exists.
Unfortunately, the draft guide is silent as to whether investments made in companies that turn out not to be qualifying companies will result in a VCC transgressing on its sole object in a manner that
can put its status at risk. On the one hand it could be argued that the requirement is that only 80% of funds invested in the VCC should be invested in equity shares of qualifying companies; therefore the remaining 20% can be invested otherwise, potentially in companies that turn out not to be qualifying companies. The draft guidance however creates the impression that this 20% buffer rather allows for other spending, for example, acquisition of a property or money in a bank account, that is still sufficiently closely connected to the activities necessary to invest in qualifying companies.
Impermissible trades
A qualifying company may not carry an impermissible trade. Many of the items listed as impermissible trades are defined as a trade in respect of certain items or activities – for example, a trade in respect of immovable property. The draft guide confirms that the phrase ‘in respect of’ should be interpreted widely along the lines of in connection with or in relation to in the context of section 12J. It should however not cause in items that are too remote to fall within the ambit of an impermissible trade. Whether a specific activity is closely connected or too remote depends on the facts of each case. Again, this is likely to be an area of uncertainty that VCCs encounter.
The draft guide further explains that the impermissible trade list refers to any trade carried on that is impermissible. It is not limited to the main or primary trade of a company and does not exclude ancillary trades. The guide provides an example – if a qualifying company carries on a retail supermarket or restaurant business and in the course of this business sells liquor, it carries on an impermissible trade. An investment in such a company by a VCC will not be an investment made in a qualifying company.
