Report back on Tax and structuring BEE Deals workshop

by Keith Levenstein – 21st September 2006

We were treated to an insightful talk today on the above topic. Cathy Bryant explained that share ownership is an important aspect of the BEE scorecard. It accounts for 20% (plus 3 bonus points) of the scorecard, and if you achieve the full 20% you may inflate that score by 25%.

She explained the various methods of achieving this, via

  • Employee share options
  • Employee ownership partners
  • Direct shareholding
  • Social empowerment partners
  • Black empowerment groups 

Each has its own pros and cons, and in some cases a company may need to use multiple methods of reaching targets, such as direct shareholding and employee ownership.

She also explained how important it is to choose the right partner, to ensure that everyone works towards the goals of the company.

Many companies are choosing the employee ownership partner method due to the motivation aspects that it induces. It is also a relatively simple structure.

This structure seems to be favoured by the dti and SARS. They have made it easier to implement and have also offered substantial tax incentives to these employee share trusts, whereas there are no other specific tax benefits to some of the other ownership methods.

Therefore the main tax incentives are aimed at helping lower level employees – those who have never been involved in share schemes previously – become more economically active in their own company.

She covered how the tax act defines what constitutes an employee share trust. It is important to ensure that the share trust is set up correctly. A company can claim various tax benefits from the scheme. For example an employer can claim a tax deduction of the market value of the shares.

This implies that a company can issue shares to its employee share trust at no or at par value, and deduct as a tax expense the difference between the market value and the value at which the shares are issued, (subject to certain conditions). At the same time the trust will pay for its shares over time as it receives dividends.

One delegate remarked “So in a way SARS is paying you for the shares in the business”.

A successful mornings work! 

We are planning on holding this tax seminar again. Watch this space for details. 

ADDENDUM

Now that we know  how tax affects the various BEE deals, it helps put them into perspective. For example the Naspers/Muiltichoice empowerment deal is a black empowerment community deal and should be a huge tax saving for Naspers .

 

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