Section 12J of the Income Tax Act, 58 of 1962 (the “Act”) prohibits a Venture Capital Company (“VCC”) to invest in an investee company which does not meet all the requirements of a ‘qualifying investee company’ (“QIC”) as set out in the Act.
One such requirement is that the company being invested in may not be a ‘controlled group company' in relation to a group of companies. A controlled group company is defined in the Act as: “a controlled group company contemplated in the definition of a ‘group of companies’”.
In terms of the definition of ‘group of companies’, an investee company will be regarded as a ‘controlled group company’ if more than 70% of its share capital is owned (directly or indirectly) by a corporate shareholder (in this case the VCC). As such, for an investee company to qualify as a QIC in terms of section 12J, at least 31% of its issued share capital must be owned by another entity / person (which is not a related party to the investor).
It is the responsibility of the VCC to ensure that it complies with the provisions of section 12J and therefore to ensure that it invests in QIC’s only. Should the VCC fail to meet this requirement, or any other requirement prescribed by section 12J, the VCC’s licence to operate as such may be revoked and penalties imposed.