Refer our article published on 31 October 2017. Focus was on the basic principles of Venture Capital Companies (“VCCs”) and the preliminary requirements for qualifying as a VCC. However, in this edition we shift the focus to the requirements relating to companies in which a VCC may invest (“Investee/s”).
An Investee must be a resident company not carrying on an “impermissible trade” (refer below) and should not be controlled by a group company in relation to a group of companies. The tax affairs of an Investee must be in order and a tax clearance certificate, issued by SARS, should be disclosed to a VCC prior its investment.
One of the main reasons government implemented the VCC regime is because of the challenges faced by small-and medium-sized companies and junior mining companies in respect of access to venture finance. Therefore, an Investee must be an unlisted company or a junior mining company, however, such junior mining company may be listed on the Alternative Exchange Division (AltX) of the Johannesburg Stock Exchange (JSE).
In terms of section 12J of the Income Tax Act, an Investee may not be carrying on a “impermissible trade” which includes the following:
- Any trade carried on in respect of immovable property, other than a trade carried on as an hotel keeper;
- Financial services such as banking, insurance and any trade carried on in respect of money-lending or hire-purchase financing;
- Financial or advisory services, including legal services, tax advisory services, stock broking services, management consulting services and auditing or accounting services;
- Any trade carried on in respect of gambling (i.e. operating a casino);
- Any trade carried on in respect of liquor, tobacco, arms or ammunition; and
- Any trade carried on mainly outside the Republic.