Tax Benefit for Search funder Investors (South Africa)
April 18, 2023
by a searcher from Gordon Institute of Business Science, University of Pretoria in Johannesburg, South Africa
I know that there is a tax benefit in certain countries for search funder investors, is there any sources of information that speak specifically to this in the South African context and generally explain this?
My best guess is that since the fund will have no income in the first two years but a bunch of expenses, the assessed loss can be carried over to the years after acquisition. this would mean that the benefit will likely only result in a benefit in the first year since the aim is to purchase a high-growth business with steady revenue.
Is there any other tax benefit that could be offered to investors as a value proposition to investing into a search fund rather than normal PE?
from INSEAD in Hermanus, 7200, South Africa
Happy to connect on this - but you'd need to speak with a tax specialist. The SARS section 12J structures used to be quite compelling for VC, and may be useful for SFs, but I'm not sure if that dispensation is still active. As far as I know ( and you should test this with a specialist) South African Pty Ltds do not offer tax-loss pass-throughs like US LLCs can to my understanding.
I'd recommend reaching out to AJM Tax advisors in Cape Town - we've spoken with them about SA SFs before and understand the basic commercial structure. Feel free to DM me.
Best,
from University of Witwatersrand in Cape Town, South Africa
Generally if your investors are acquiring pref shares or ordinary shares in your vehicle, it'll be capital in nautre. So no upfront tax deductions but capital gains tax treatment on an exit.
The main questions an advisor will ask you is are your potential investors local or foreign as this determines whether an en commandite partnership or holding company structure may work best to optimise the tax position.
Good luck!