VC in South Africa gets a tax boost

Hopeful to stir economic growth in startups and early-stage companies, South Africa’s government is offering tax breaks to investors in local venture funds investing in venture capital companies (VCC).

Already the government offers tax deductions for investors in VCCs but taxes apply when VCC shares are sold. The reforms eliminate that tax if the investment is held for at least five years.

The Southern African Venture Capital & Private Equity Association (SAVCA) and local GPs are praising the reforms.

“I have no doubt that, with the allowance now becoming a permanent deduction, this will attract a large flow of investment into our fund, as individuals and trusts with high taxable income will want to take advantage of this new tax-efficient asset class,” said in a statement Jeff Miller, non-executive director at South African venture firm Grovest.

The government is also expanding the scope of companies that can meet the VCC definition. Businesses with up to ZAR50 million ($4.3 million; €3.5 million) in total assets can be targeted by VCC funds, a 150 percent increase from the current ZAR 20 million threshold that GPs criticized as being too low from a risk management perspective.

“Quite simply, it was not economical for fund managers to set up funds to invest solely in assets of that size, and the level of risk involved in such small investments kept most investors away,” said Rick Basson, co-founder of SAVCA-member firm Broadreach Capital.

The tax amendments will come into effect on April 1, 2015.

But despite the recent reforms, the SAVCA is calling for more tax changes to further develop South Africa’s venture capital industry. The South African tax authorities indicated in the February there would be capital gains tax concessions for investors into VCCs, but this has not yet been implemented in full.