Huge ROI Boost in the Renewable Energy Sector through Section 12J

Section 12J of the Income Tax Act is extensively used by a significant number of renewable energy investors, and EPCs (“Project Developer/s”), to increase their return/competitiveness in the South African market. Industry leaders are Section 12J structures to significantly boost their return on investment (“ROI”) via the associated tax rebate.

Having structured multiple renewable energy projects in both the wind and solar sector, we have seen, first hand, the enhanced returns associated with structuring renewable energy projects through Section 12J Venture Capital Companies (“Section 12J VCC”).

ROI BOOST

Structuring the equity investment of renewable energy projects through a Section 12J VCC provides significant increases in equity returns for Project Developers. There are, however, ways for Project Developers to achieve an even larger uptick in return through additional adjustments in the finance structure.

An example of one of these adjustments is for the Project Developer to raise debt for a portion or the entire funding requirement. The debt and equity can then be invested into the Section 12J VCC. Provided that the debt qualifies, the investor will still be eligible to claim a tax rebate on the full investment amount.

By way of illustration, should a Project Developer invest equity of R30 million and debt of R70 million into a Section 12J VCC, the Project Developer will receive a rebate on the full R100 million (this would amount to a rebate of R28 million for companies and up to R45 million for trusts and Accordingly, assuming the Project Developer has sufficient taxable income, the Project Developer could effectively repay close to half of its debt in year one if a company, and close to two-thirds of its debt over the same period in the case of a trust or individual.

In addition, a Section 12J VCC can be structured such that the Project Developer can still benefit from the Section 12B rebate for renewable energy projects.

Having the right structure can significantly boost the project’s ROI by more than 20%. 

TYPICAL SECTION 12J RENEWABLE ENERGY STRUCTURES

We have tried and tested several Section 12J structures for renewable energy projects, thus for illustrative purposes, we have set out below two typical Section 12J structures used in the renewable energy sector, however, these structures can be amended to suit a client’s needs:

Structure 1 – Lease / PPA Structure 

This structure is typically used where the Project Developer is looking to develop a project/s to either lease the renewable energy asset to the customer or conclude a PPA with the customer.

As illustrated in the diagram below, the Project Developer will structure its project through the Section 12J VCC. Once completed the renewable energy asset will either be leased to the customer or a PPA will be concluded with the customer.

Given the significant tax rebate associated with Section 12J, the Project Developer could either benefit from higher returns on the discount the lease (or the PPA tariff) to the customer in order to make the offering more attractive.

Structure 2 – Customer-owned structure    

This structure is typically used where the customer elects to own the renewable energy asset. As illustrated in the below diagram, the Project Developer forms its own Section 12J VCC and the customer will invest funds (debt/equity) into the Section 12J VCC. In the customer would receive the tax rebate and be issued with a specific share class linked to a specific special purpose vehicle (“SPV”). The Section 12J VCC would then the SPV and develop the renewable energy asset.

The specific class of share will ring-fence all economic benefits flowing from the SPV to the customer and ensure that no other investor has exposure to the customer’s SPV. Once the renewable energy asset has been developed, the SPV will either lease the asset to a third party or a PPA will be concluded with a third party. In certain circumstances, the third party can be replaced by the customer.

Given the significant tax rebate, the customer will effectively be acquiring the renewable energy asset from the developer or the EPC at a discount (28% to 45%).

OTHER BENEFITS – FUNDRAISING

Section 12J VCC’s are excellent vehicles to assist Project Developers with raising finance for their projects from investors who typically appreciate renewable energy returns and are thus further to invest into the renewable energy projects due to the 28% to 45% rebate on an investment they would ordinarily have made without the rebate.

From our perspective, we have seen an increasing interest in funding renewable energy projects through Section 12J VCCs.

HOW DO I TAKE ADVANTAGE OF SECTION 12J?

Formation and structuring 

If you are considering forming a Section 12J VCC, we provide customers with a complete Section 12J service offering. This includes formation, structuring, registration and administration of the Section 12J VCC. Included in our offering are the necessary legal agreements drafted by ENSAfrica.

Don’t need your own Section 12J VCC but have a few projects? 

Having formed multiple Section 12J VCCs, we can introduce Project Developers to existing Section 12J VCCs, which can be used to structure their projects through.

Fundraising

Having raised hundreds of millions of Rands, we are well positioned to assist customers with forming a Section 12J VCC and raising finance for their projects. During the fundraising process, Jaltech will assist the Section 12J VCC through every step of the fundraising process, this includes preparing the private placement memorandum (“PPM”), which is presented to potential investors. The PPM will include all the relevant information necessary for investors to consider investing into the project/s.

Articles to follow:

  • Moveable asset leasing
  • Mining
  • Private Equity
  • ED & SD

For further information feel free to contact Jonty Sacks at jonty@jaltech.co.za

Article Source

Unit 19,1 Melrose Blvd, Melrose Arch
Gaurav Nair  |  Director email: gaurav@jaltech.co.za
Derrick Hyde  |  Director email: derrick@jaltech.co.za
Jonty Sacks  |  Director email: jonty@jaltech.co.za

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