Double Non-taxation of Hybrid Debt Instruments Issued by Non-residents
04 October 2016
Posted by: Author: Esther van Schalkwyk
Author: Esther van Schalkwyk (BDO SA)
National Treasury indicated its intention to address double non-taxation, if an issuer of a hybrid debt instrument is not a South African resident taxpayer, with effect from 24 February 2016.
Debt instruments containing equity features are commonly referred to as hybrid debt instruments. The anti-avoidance rules contained in the Income Tax Act reclassify interest on “hybrid debt instruments” and “hybrid interest” as dividends in specie in the hands of the issuer and the holder of an instrument. As a result, the issuer of the hybrid debt instrument is denied an interest deduction against its taxable income and is usually subject to dividends tax. The holder, on the other hand, is deemed to receive an exempt dividend instead of an interest payment.
As explained in the 2016 Budget, the South African government cannot effectively deny interest deductions to foreign issuers of hybrid debt instruments in their countries of residence. This results in a double non-taxation or mismatch between the two countries as the holder is deemed to receive an exempt dividend and the foreign issuer may claim an interest deduction. Many countries work together to address the exploitation of tax mismatches between jurisdictions, known as Base Erosion and Profit Shifting (BEPS).
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This article first appeared on bdo.co.za.