Equity Equivalent Programmes

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v16_n3_a4
• Author: Michael Rudnicki Rudnicki
• Pages: 23-29
• Date: 01 November 2025
• Published date: 01 November 2025
• Published By: Siber Ink

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Equity Equivalent Programmes:

A TAX ANALYSIS

MICHAEL RUDNICKI*

ABSTRACT

The concept of ‘Equity Equivalents’ in the context of BEE ownership rules

and regulations is rearing its head once more. Foreign organisations seeking

investable presence in South Africa are cautious about giving up true equity.

Ownership points play a key role in the ‘BEE score card’ table. The Department

of Trade, Industry and Competition has historically accepted an alternative

basis to transfer equity to black owned small and medium organisations. The

alternative is referred to as an ‘Equity Equivalent’ programme.

The programme typically envisages a percentage of turnover over a period

of time (typically seven to ten years) to be deployed in qualifying benef‌i ciaries

or participants in categories of investment such as supplier development,

training and research.

This article considers the tax deductibility of the EE expenditure in terms of

section 11(a) of the Income Tax Act (’the Act’).

It is submitted that expenditure is ‘actually incurred’ not at the time of

signing the framework agreement with the DTIC, but when the contractual

obligation to pay benef‌i ciaries arises.

The ‘in the production of income’ test focuses primarily on the act giving

rise to expenditure. In the Warner Lambert case (see below for detail), the

court concluded that expenditure incurred in respect of social responsibility

obligations meets the ‘in the production of income’ test. It is submitted that

BEE related expenditure incurred to retain and grow market share meets this

test. So too, it is submitted, does expenditure incurred in respect of the EE

programme meet this test. The purpose of concluding this programme is to

maximise earnings covering existing and new markets.

The more sensitive issue in respect of EE related expenditure is the capital

versus revenue nature of the expense. Generally, expenditure incurred in

performing the income-earning operations of a business is revenue in nature.

Expenditure incurred as part of the cost of establishing or enhancing or

adding to the income-earning structure is capital in nature. Supplementary

tests are the ‘once and for all test’ and the ‘enduring benef‌i t’ test.

Warner Lambert, supra, considered the social responsibility expenditure in

the context of capital and revenue. It concluded that the taxpayer’s income-

earning structure had been erected long ago. The expenditure it incurred

was to protect its earnings. Accordingly, the judgment concluded that the

expenditure was revenue in nature. In the case of companies having erected

their income-earning structure long ago, the EE related expenditure does not

create an additional structure. Ownerships points are but one of the elements

of the BEE scorecard. But the key feature of the expenditure is to maintain and

improve market share, thereby protecting the entity’s earnings. As a result, it

is submitted, such expenditure is not of a capital nature. The same conclu-

sion should prevail, it is submitted, where a foreign organisation establishes

* Tax Executive, Bowman’s Attorneys.

2025 16(3) BTCLQ 23

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