ARTICLE · 06 FEBRUARY 2015

When Interest Becomes A Dividend: Hybrid Debt Instruments

Cox Yeats

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As of 1 April 2014 the Income Tax Act 58 of 1962 (the Act) was amended to regulate "hybrid debt instruments" more closely.

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Michael Jackson

Keren Watson

Simon Watson

Jason Goodison

Jenna Padoa

As of 1 April 2014 the Income Tax Act 58 of 1962 (the Act) was amended to regulate "hybrid debt instruments" more closely. A "hybrid debt instrument" now includes much more than it did before. This circular looks at the revised section 8F and the new section 8FA of the Act in order to identify where common shareholder loan arrangements may need to be revised.

WHAT IS A HYBRID DEBT INSTRUMENT?

A hybrid debt instrument is a loan agreement which is treated, for the purposes of the Act, as being an equity arrangement as opposed to a normal loan arrangement.

When a company owes debt and pays interest on it, the company can ordinarily deduct from its taxable income, the interest payable on the loan. The creditor receiving the interest receives income on which tax is payable.

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