Section 8EA – "Qualifying Purpose" Test Tempered By Introduction Of Ownership Requirement

When raising finance by way of preference shares, taxpayers are well aware of the risks posed by the anti-avoidance provisions of sections 8E and 8EA of the Income Tax Act ("the Act") and care is taken to ensure that preference shares which are typically issued to fund the purchase of share investments, do not fall foul of these provisions.

Section 8E is aimed at preference shares that are 'hybrid equity instruments', while section 8EA targets shares that are 'third-party backed shares'. If the preference shares meet the requirements of either of these provisions, any dividends declared and paid to their holders are deemed to be income for the full year of assessment in which they are so characterised (even if that status only applies for a portion of that year).