South African tax bill amends hybrid instrument rules, eliminates planned withholding on service fees

by Peter Dachs, ENSafrica, Cape Town

The South African National Treasury on 8 July proposed various interesting tax law amendments, including the elimination an earlier proposal to impose withholding tax on service fees, and modifications to the tax treatment of hybrid debt, share incentive schemes, and trusts that provide interest-free loans.

Public comments on the proposed legislation, Taxation Laws Amendment Bill for 2016, have been requested by 8 August.

Hybrid debt instruments

Under current law, interest paid on various debt instruments with certain specified equity features is treated as a dividend for tax purposes. This means that no deduction is granted in respect of such interest for the borrower and, conversely, the lender receives a tax-exempt dividend.

These provisions are being amended. First, where such debt instruments are issued by a non-resident entity, the hybrid debt rules would only apply if such non-resident entity issues the debt instrument from a South African permanent establishment or if the non-resident entity is a controlled foreign company of South African residents.

The rules are also being amended to state that where such hybrid debt instruments are subject to, for example, put and call arrangements in terms of which the holder has the right to transfer such debt instrument to another party, the hybrid debt provisions will not apply. This brings the hybrid debt rules in line with the rules relating to preference shares.

International tax amendments

The proposed withholding tax on service fees has been withdrawn. This means that the proposed 15% withholding tax which was to be imposed on technical, management and consulting services will no longer be introduced.

South Africa would therefore impose withholding taxes only on royalties, interest, and dividends at a rate of 15%.

Share incentive schemes

Under current law, In respect of various share incentive arrangements, individuals are taxed on the difference between the market value of the shares on date of vesting and any amounts paid for such shares. This means that certain dividends paid on these shares prior to vesting were exempt from income tax in the hands of such individuals.

It is now proposed that such dividends declared prior to vesting of the shares will be subject to income tax in the hands of the holder.

Use of trusts

It is also proposed that in circumstances where an interest-free loan has been advanced to a trust a market related rate of interest is deemed to be paid on that loan. This deemed interest would be taxable in the hands of the lender. To the extent that the tax payable by the lender is not recovered from the trust, the new legislation would provide that it is  treated as a donation to the trust and donations tax will be imposed thereon.

— Peter Dachs is a director at ENSafrica, Cape Town, where he specialises in financial services, mergers and acquisitions, and international tax. He can be reached at


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