Co-operatives – a suitable BEE tool

Co-operatives are not new to South Africa. However, the Co-operative Act – rewritten and promulgated in 2005 – states rather clearly that it aims to create a tool for sustainable broad-based black economic empowerment.

The following principles relating to co-operatives are of special importance, particularly from a BEE point of view:

1. Interest held by a co-operative versus interest held by trust:

• A co-operative has the same legal status as a company (as contemplated by the Companies Act, 71 of 2008). Where a trust has beneficiaries, a co-operative has members. For BEE purposes, a co-operative will be considered to be a black-owned entity as long as more than 50% of its members are black people. Where a black-owned entity holds interest in a company, 100% of that interest will be taken into account when calculating the percentage of interest in the hands of black people. An example is: Where a co-operative with 75% black members holds a 26% interest in a company, the effective interest in the hands of black people amounts to 26% (as a result of the modified flow-through principle).

• Contrary to this, the percentage of black beneficiaries of a trust will determine the effective interest held by black people. An example is: If a trust with 75% black beneficiaries holds 26% of the interest in a company, the effective interest in the hands of black people will be only 19.5% (75% of 26%). This is the result of the flow-through principle.

2. Assets of a co-operative

• A co-operative can be compared to a sports or similar club. Just like the assets of a sports club never become the property of its members, so the members of a co-operative have no claim on the assets of that co-operative.

• A member leaving the co-operative therefore has no claim on the assets of the co-operative. This prevents the asset base of the co-operative from being diluted every time a person’s membership is terminated.

• A central principle of B-BBEE is that black people should receive real economic benefits. For as long as a person is a member of a co-operative, that person will receive economic benefits through remuneration, profit share or other forms of transacting with the co-operative. When a person ceases to be a member of the co-operative, his/her access to economic benefits also ceases.

3. Membership of a co-operative

• Members are admitted based on a pre-determined set of rules, i.e. the so-called constitution. For as long as the member adheres to the rules, the membership status will remain.

• When members do not adhere to the rules, they may be requested to resign as members of the co-operative. Contrary to the rules for companies, members cannot refuse to resign. This provides more flexibility to ensure that the composition of the co-operative remains optimal.

• When a black shareholder sells his/her share in a company to a white person, the transaction may result in the company losing its favourable BEE-status. However, where the shareholder is a black-owned co-operative and one of its black members resigns, the status will not be influenced (as long as there are more than 50% black members after the transaction).

4. Dividends received by a co-operative

• Dividends declared by a company to a co-operative will be exempt from dividends tax. This is because a co-operative is defined as a company in terms of paragraph (c) of the definition of a company in the Income Tax Act, 68 of 1962. Dividends declared to a resident company are exempt in terms of section 64F of the Income Tax Act.

These principles can be applied fruitfully when determining a BEE strategy, but must be considered along with various other rules and regulations pertaining to the Companies Act, Income Tax Act, B-BBEE Act and the B-BBEE Codes of Good Practice.

For further information, contact Jaco Odendaal of Exceed Tax & Advisory Services on tel. 021 882 8140 or e-mail jaco@exceed.co.za.