Hybrid equity changes dropped from 2025 draft tax bill
National Treasury and SARS have withdrawn the proposed changes to the definition of hybrid equity instruments in the 2025 draft Taxation Laws Amendment Bill following stakeholder concerns, with public consultation still open until September 12.
Following stakeholder concerns, the National Treasury and South African Revenue Service have withdrawn the proposed changes to the definition of hybrid equity instruments in the 2025 draft Taxation Laws Amendment Bill.
Public consultation is still open until September 12.
According to information released by SAnews.gov.za, the draft legislation and accompanying explanatory memorandum were published on August 16 for public comment.
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The withdrawn proposal had sought to refine the treatment of preference shares under Section 8E of the Income Tax Act.
Currently, the law uses a set of anti-avoidance rules, including a three-year criterion, to determine whether a preference share displays debt-like features. Such shares result in taxable dividends for the holder.
The 2025 draft TLAB had proposed a principle-based approach, aligning South Africa with international practice by focusing on the economic substance of financial instruments rather than their legal form.
For example, a preference share with a fixed mandatory dividend or a redemption date could be treated as a loan (debt) for tax purposes.
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National Treasury said the amendment aimed to ensure that instruments resembling debt were treated accordingly for taxation, preventing the misuse of dividend exemptions to reduce tax liabilities.
However, numerous stakeholders raised concerns that the broad wording of the draft legislation could effectively eliminate preference shares as a viable financing option.
The uncertainty surrounding the proposal was already affecting ongoing transactions and could potentially delay investments.
To address these concerns, the Minister of Finance, following advice from National Treasury and SARS, retracted the hybrid equity instrument proposal from the 2025 draft TLAB.
National Treasury emphasised that any future structural changes to the taxation of hybrid equity instruments will follow a consultative process with stakeholders to ensure a balanced approach before draft legislation is published.
