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The benefits of investing in venture capital
companies

Candice Reynders
June 2018

“A business colleague recently chatted to me about an investment he made
in what he called a venture capital company and how he was not only
investing in local companies but was also receiving substantial tax benefits
for doing so. What is a VCC and can you really get tax benefits for investing in
such companies?” Commercial

A venture capital company or “VCC”, although receiving market interest of late,
is not a new thing and was introduced in 2009 as section 12J of the Income
Tax Act 58 of 1962 (the “Act”). The VCC forms part of Government’s philosophy
of expanding economic growth through incentivising investment in small
businesses and junior mining operations. Essentially an investor acquires venture
capital shares in a VCC which would in turn invest in qualifying investment
companies by acquiring shares in such companies, provided such underlying
companies do not conduct impermissible trades as defined by the Act.

This mechanism then promotes economic growth by creating a funding
mechanism for small businesses and junior mines. The incentive for such
investment in a VCC (and in turn in the underlying companies), is that SARS,
subject to meeting the required conditions, provides for a 100% taxable
deduction from the income tax of the taxpayer (investor) for the actual
expenditure incurred by the taxpayer in obtaining the venture capital shares in
the VCC and ultimately the underlying companies.

From the above, the VCC however appears just like an ordinary investment
company, using investor funds to invest in other companies. Why then the
beneficial tax treatment for the investor? The answer lies in the strict requirements
contained in section 12J of the Act. Non-compliance with these will affect the
ability of the investor to claim the deduction.
To qualify as a VCC, the company needs to be a tax compliant resident
company with the sole object of the company being the management of
investments in qualifying companies, licensed as such under section 7 of the
Financial Advisory and Intermediary Services Act 37 of 2002.

Once a VCC is established and licensed, the VCC must satisfy the following
requirements by the end of each year of assessment after the expiry of three
years from the first date of issue of venture capital shares:

• A minimum of 80% of the expenditure incurred by the VCC must be utilised
to acquire qualifying shares in qualifying companies.
• The expenditure incurred by the VCC to acquire qualifying shares in any

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