The BBBEE Commissioner issued a non-binding Practice Guide on 31 March 2017 stating that, in her opinion:

“The modified flow through principle cannot be used to benefit from the enhanced recognition status reserved for 51% and 100% black owned EMEs and QSEs. Any contrary advice would be regarded as a misrepresentation of Entity B’s B-BBEE status which is an offence in terms of section 13O (1) (a) of the Act.”

The enhanced recognition status that is referred to means the automatic qualification of 51% black-owned QSE’s or EME’s to a level 2 status and the automatic qualification of 100% black-owned QSE’s or EME’s to a level 1 status.

According to the BBBEE Commissioner, the calculation of this 51% of 100% black-ownership must be done based on the ordinary flow principle only.

Although the Practice Guide is non-binding, it certainly shows how the Commissioner will deal with fronting practices involving such QSE’s and EME’s.

This may affect many deals already in place which have been based on the modified flow through principle in calculating black ownership of a QSE or EME.