Save 28% to 45% Using Section 12J Structuring

April 14, 2018

 Private equity firms, family offices, private individuals, trusts and companies who have invested in start-ups or mature businesses during 2017 may have missed a huge opportunity if they have not considered investing through a Section 12J Venture Capital Company (“VCC”).

At first glance, sophisticated investors may be convinced that Section 12J has no application to their investments. However, if investors are South African taxpayers, the chances that their investment/s may qualify for the Section 12J associated tax incentive are high.

The Section 12J benefit translates into a tax rebate on the full investment (28% for companies and up to 45% for individuals and trusts). This, in turn, results in a significant boost to returns on investment. 

When considering whether Section 12J is applicable to an investment, one would need to determine whether any of the below elements exist. If they do, then an investment will be regarded as non-qualifying and thus Section 12J will not have application: 

  1. the book value of the target company exceeds R50 million (unless the investment can be broken down into separate special purpose vehicles);

  2. the target company earns more than 20% of its income from investment income (for example, an investment into an investment holding company would not be permissible);

  3. the target company carries on majority of its trade outside of South Africa;

  4. the target company carries on one of the following “Impermissible Trades”: 

    1. any trade carried in respect of immovable property, other than a trade carried on as a hotel keeper (i.e. an investment in hotels, serviced apartments, holiday homes and student residences under certain circumstances, will be permissible);

    2. any trade in the financial services sector (for example, banking, insurance, money lending, hire-purchase arrangements etc., however, this doesn’t prevent an investor from investing in technology within this sector);

    3. any trade carried on in respect of financial or advisory services, including trade in respect of legal services, tax advisory services, stock broking services, management consulting services, auditing or accounting services; and

    4. any trade carried on in respect of gambling, liquor, tobacco, arms or ammunition.

On the premise that an investor’s investment does not fall into one of the categories above, there is a real opportunity to take advantage of the Section 12J associated tax benefits. Accordingly, if you have just realised that Section 12J may be applicable to your business, or if you are still not sure, feel free to contact us for professional advice in this regard.

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