PROPOSED AMENDMENTS TO VENTURE CAPITAL COMPANY REGIME
National Treasury has on 16 July 2018 issued the draft Taxation Laws Amendment Bill (the draft TLAB) and the draft Tax Administration Laws Amendment Bill for comment.
The draft TLAB contains proposed changes to section 12J of the Income Tax Act, 1962, which are very concerning for the venture capital company (VCC) industry.
One of the biggest issues is going to be the limitation on both VCCs and the target companies (qualifying companies) to only having a single class of shares. The amendments are proposed to come into effect on 1 January 2019, but will also apply to existing VCC structures. This is an enormous problem for most VCC structures in the market. Based on the proposed wording as set out in the draft TLAB, most VCC structures would have to be amended and if this is not possible (and in most instances it would be very difficult if not impossible to amend the structures to comply with the proposed amendments), the structures would have to be unwound since the proposed changes would have the effect of disqualifying existing structures, even if they were approved by SARS and even where SARS issued positive rulings.
Another important proposed change is the condition that qualifying companies should derive substantially all of their trading income from transactions with persons who are not direct or indirect shareholders of the qualifying company, and who are not connected to such shareholders.
Bowmans is preparing a submission to National Treasury in respect of the proposed changes, highlighting the devastating impact it would have on the VCC industry and the fact that the amendments would have retrospective effect. It would be ideal for VCC companies to coordinate their efforts in this regard, to try and ensure that the comments are consistent. You are more than welcome to contact Aneria Bouwer or Joshua Janks of the Bowmans VCC team if you would like to share your views in this regard.