SAVE 28% TO 45% USING JALTECH’S SECTION 12J STRUCTURING SERVICES
Private equity firms, family offices, private individuals, trusts and companies who have invested in start-ups or mature businesses during 2017 may have made a huge mistake if they have not considered investing through a Section 12J Venture Capital Company (“VCC”).
At first glance, sophisticated investors may be convinced that Section 12J has no application to their investments. However, if investors are South African taxpayers, the chances that their investment/s may qualify for the Section 12J associated tax incentive are high.
The Section 12J benefit translates into a tax rebate on the full investment (28% for companies and up to 45% for individuals and trusts). This, in turn, results in a significant boost to return on investment.
When considering whether Section 12J is applicable to an investor, one would need to determine whether any of the below elements exist. If so, an investment will be regarded as non-qualifying and thus Section 12J will not have application:
- the gross asset value of the target company exceeds R50 million (unless the investment can be broken down into separate special purpose vehicles);
- the target company earns more than 20% of its income from investment income (for example, an investment into an investment holding company would not be permissible);
- the target company carries on of its trade outside of South Africa;
- the target company carries on one of the following “Impermissible Trades”:
- any trade carried in respect of immovable property, other than a trade carried on as a hotel keeper (i.e. an investment in hotels, serviced apartments, holiday homes and student residences under certain circumstances will be permissible);
- any trade in the financial services sector (for example, banking, insurance, money lending, hire-purchase arrangements etc, however, this doesn’t prevent an investor from investing in technology within this sector);
- any trade carried on in respect of financial or advisory services, including trade in respect of legal services, tax advisory services, stock broking services, management consulting services, auditing or accounting services; and
- any trade carried on in respect of gambling, liquor, tobacco, arms or ammunition.
On the premise that an investor’s investment does not fall into one of the categories above, there is a real opportunity to take advantage of the Section 12J associated tax benefits. In order to illustrate a vanilla Section 12J transaction, we have set out below a recent transaction structured on behalf of a client.
In this case study, the investor is a property holding company which is looking to Section 12J for three reasons, namely to:
- invest in solar PV which will be installed on the property holding company’s roof. The power will be sold to the property holding company;
- acquire equity in an existing business; and
- a cleaning services company which will offer its services to the property holding company and to third parties.
Effectively, the transactions will flow as follows (see below diagram):
- the property holding company will invest R50 million into the VCC and in return receive equity in the VCC and a tax deduction of R14 million.
- the VCC will then:
- acquire issued equity in the target company; and
- the solar SPV and the cleaning services SPV. The solar SPV will acquire the solar assets and enter into a power purchase agreement with the property holding company (that way ensuring the Section 12B deduction) and the cleaning services entity will the capital injection for operational purposes.
IS THIS REALLY SO SIMPLE?
Absolutely, provided the structure from the outset is compliant with the legislation and the company managing the VCC has the correct compliance processes, expertise experience.
HOW DO I KNOW WHETHER MY TRANSACTION COMPLIES WITH SECTION12J?
If your investment falls outside of the categories mentioned above, then there is a very high probability that your transaction may well comply with the Section 12J requirements.
Accordingly, If you have just realised that Section 12J may be applicable to your business, or you are still not sure, feel free to email Jonty Sacks (firstname.lastname@example.org) or Rory Sim (email@example.com) and they will be sure to assist you with determining whether there is an opportunity for you to structure your transaction through a VCC.
We have structured VCCs across multiple sectors and we work exceptionally close with ENSAfrica in order to be 100% certain our structures are legally sound. Below are a few examples of the sectors which we have experience in structuring Section 12J transactions:
- renewable energy: Commercial and residential rooftop solar, large PV projects and wind energy projects
- hospitality: Student residence developments, hotel developments, holiday homes in specific estates,
- Moveable leasing