A review of the South African venture capital company regime
De Klerk, Bianca
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SMMEs are of great importance to the economy of any country, therefore the government should encourage the establishment and growth of SMMEs as a tool to address unemployment and inequality. Consequently, in an attempt to encourage equity funders to invest in SMMEs, the government of South Africa enacted the VCC regime. With effect from the 1st of July 2009, in terms of section 12J of the Act, investors (any taxpayer) can claim an upfront income tax deduction in respect of the expenditure incurred in exchange for the acquisition of VCC shares. The deduction allowed in the hands of investors will not be recouped if the investment is retained for a period exceeding five years. Consequently, after the restriction period the taxpayer should not be subject to normal income tax upon disposal of the VCC shares. The investor's base cost in the VCC shares will, however, reduce by the initial tax deduction claimed and, therefore, upon disposal of the VCC shares, the investor could be subject to CGT on the entire proceeds received. The VCC regime is often criticised for being tax-inefficient as investors are fully taxed on the growth of the investment. Therefore, this literature review aims to address the research question: Does the current South African VCC regime achieve its underlying objectives and can the regime, in its current form, achieve these objectives in the future? As currently written, the VCC regime would expire on the 30th of June 2021. From the research conducted in this study, it is evident that the VCC regime only started meeting its objectives within the last five years, post significant amendments to section 12J of the Act. Even though amendments were made to align the VCC regime to its objectives, several shortcomings to the South African VCC regime are noted when compared to the United Kingdom venture capital regimes. This is especially true with regard to the tax relief provided to VCC investors. In light of the shortcomings identified, the study includes various recommendations to improve the current section 12J of the Act. Most significantly, it is recommended that the sunset clause of the VCC regime be revised, based on the fact that to date, the VCC industry did not have policy certainty and the economic impact of the VCC regime has not been fully assessed. It is further concluded, if National Treasury considers extending the sunset clause of the VCC regime, some amendments should be incorporated in the current section 12J of the Act, in order to enable the VCC regime to fully achieve its objectives and make a lasting impact on the South African economy.