Venture Capital Companies: Re-Introduction Of Deduction Limitation
The venture capital company (“VCC”) regime was introduced into the Income Tax Act No. 58 of 1962 more than a decade ago. The purpose of this regime is to raise equity funding in support of small businesses which would otherwise not have access to market funding.
In short, the benefit of investing in a VCC by way of a subscription for shares is that the investor obtains a deduction during the year of assessment of investment equal to the subscription proceeds.
At the time of the introduction of the VCC regime in 2008, the legislation contained strict investor requirements and limitations. For example, in respect of natural person investors, the deduction was limited to R750,000 per year of assessment as well as a lifetime limitation of R2.25 million.
The initial response of the market to the VCC regime was slow and accordingly, in order to promote investments in VCCs, amendments made to the legislation sought to remove the limitation of the deduction for subscription proceeds. Over the course of time, further amendments were made to the VCC legislation so as to broaden its scope. As a result, the uptake of this regime has increased significantly over the past few years.
In addition to the above-mentioned amendments to the VCC legislation, certain measures have been introduced in the legislation to counter tax avoidance on the basis that certain taxpayers attempt to undermine the principles of the VCC regime to benefit from excessive tax deductions.
Accordingly, the Draft Taxation Laws Amendment Bill, 2019 (“DTLAB”) released by National Treasury on 21 July 2019 proposes to reintroduce a limitation of the amount to be deducted in respect of taxpayers subscribing for shares in VCCs. It is proposed that such deduction be limited to R2.5 million per VCC shareholder per year of assessment and such limitation is proposed to come into operation on 21 July 2019 in respect of expenditure incurred by a taxpayer on or after such date.
Accordingly, notwithstanding that the DTLAB has not yet been enacted, taxpayers wishing to invest in a VCC on or after 21 July 2019 should be mindful of the proposed limitation of the deduction.