A marriage of for-profit and not for profit: An empowerment compliance dream? – Public Benefit Organisations
02 Mar 2020
A Public Benefit Organisation (“PBO“) is defined in the Income Tax Act 58 of 1962 as amended (“ITA”) as a South African non-profit company or a trust which has the sole or principal object of carrying out one or more public benefit activities. A PBO enjoys various tax benefits.
The Codes of Good Practice (“Codes”) issued under the Broad-Based Black Economic Empower Act 53 of 2003 as amended (“BBBEE Act”) provides that a PBO may contribute to black ownership if it is structured as a Broad-Based Ownership Scheme (“BBOS”). This means that a PBO which is also a BBOS may contribute towards the compliance with the ownership scorecard under the Codes. Amongst other requirements the participants in a BBOS and their claims to distributions from the BBOS must be clearly defined and that the “fiduciaries” (i.e. directors or trustees) of the BBOS must have no discretion in this regard. Also, around 85% of all benefits or distributions by the BBOS must be made to Black People as defined in the BBBEE Act.
Although this has become a popular arrangement theoretically based on a mutually beneficial exchange, it may be an exchange which is at the core worlds apart. Non-profit companies and PBOs are focussed on the upliftment of the beneficiaries they serve, which is driven by social awareness. The profit company, on the other hand, is driven by profit-making. Often these two concepts are irreconcilable, especially in decision-making methodologies. It is a complex partnership, which if successful, must be carefully constructed and managed.
Recently the BBBEE Commission has adopted the attitude that:
“the objects of a BBOS must be limited solely to promoting the ownership of assets by Black People. More particularly, where a BBOS is also a PBO, the Commission is requiring that the PBO limits its objects to promoting black ownership, failing which the Commission’s view is that the PBO cannot contribute BBBEE ownership points.” 
The result of this is uncertainty, especially among PBOs. This could give rise to a mass exodus of PBOs from these agreements; this could cripple both entities, not to mention the risk of litigation flowing from this.
With that being said, the Codes do not detail this approach, and the only binding amendment is by the Minister of Trade and Industry. The Commission does not have the power to make such an amendment.
In the meantime, it is recommended that PBO’s and for-profit affected entities take legal advice and prepare for a “divorce” of some sorts pending receipt of much-needed clarification. https://www.werksmans.com/legal-updates-and-opinions/questioning-the-bbbee-commissions-approach-to-public-benefit-organisations-in-bbbee-ownership-structures/: accessed 23 February 2020.
- Dividends tax: The importance of determining when a dividend is “due and payable
- How to get the most out of Charitable Donations