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South Africa: National Budget Speech 2024 – tax takeaways within the private equity context

6 March 2024
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Overview

  • The Budget Speech for 2024 delivered by South African Finance Minister Enoch Godongwana has various implications for the private equity industry.
  • In his Speech, the Finance Minister indicated that authorised dealers will now be authorised to allow South African private equity funds, that are licensed with the Financial Sector Conduct Authority, to invest offshore up to ZAR 5 billion per applicant per calendar year.
  • In addition, Treasury has proposed that, in the context an en commandite partnership or limited partnership, the definition of ‘connected person’ will be reviewed, to temper the unintended impact of current definition which is very broad.

On 21 February 2024, South African Finance Minister Enoch Godongwana delivered his Budget Speech. Members of our Tax Practice have highlighted the following implications of the Speech for the private equity industry.

Foreign direct investment – private equity funds

In terms of the current foreign direct investment (FDI) policy, private equity (PE) funds that are members of the South African Venture Capital Association (SAVCA) and that are mandated to invest outside the Common Monetary Area (CMA), may apply to the Financial Surveillance Department (FinSurv) for approval to invest offshore.

In the 2024 Budget Speech, the Finance Minister indicated that authorised dealers will now be authorised to allow South African PE funds, that are licensed with the Financial Sector Conduct Authority (FSCA), to invest offshore up to ZAR 5 billion per applicant per calendar year in line with the outward foreign direct investment policy. (Note: the fund manager and not the PE fund itself will be required to be licensed with the FSCA.)

FinSurv has issued a draft circular to this effect for public comment. Once it has finalised the circular, the new dispensation will come into effect.

The connected person definition in relation to partnership

In the PE space, an en commandite partnership, also known as a limited partnership, is commonly used as an investment vehicle. The liability of the limited partners to creditors of the partnership is limited to their capital contributions to and income from the partnership.

In terms of paragraph (c) of the definition of ‘connected person’ in section 1 of the Income Tax Act, members of a partnership are ‘connected persons’ in relation to each other and to any connected person in relation to such a partner. Treasury acknowledges that the wide definition has an unintended impact on limited partners in an en commandite partnership.

For example, the transfer pricing rules apply in respect of cross-border transactions between connected persons. If a non-resident limited partner (or a connected person in relation to such a partner) should thus enter into a transaction with one of the underlying South African resident investee companies of the PE fund, that transaction could be subject to the transfer pricing rules if the PE fund held 20% of the shares in that company.

Furthermore, if the PE Fund should make a foreign investment and holds more than 50% of the shares or voting rights in the foreign company, the tax resident limited partners will be exposed to the controlled foreign company (CFC) attribution rules even if each of the limited partners held an interest of less than 10% of the shares (which would otherwise be an excluded interest in the CFC). These implications were not envisaged by the Legislature.

Treasury proposes that where the limited partner is a ’qualifying investor’ (a defined term in the Income Tax Act which essentially refers to the limited partners), the definition of ‘connected person’ will be reviewed to temper the impact.