Due to the potential adverse investment impact and stakeholder concerns on the proposed amendment to the definition of “hybrid equity instrument” in the 2025 draft Taxation Laws Amendment Bill (“Bill”), the proposed amendment has been retracted. On 03 September, the National Treasury issued a media statement retracting the proposal to redefine hybrid equity instruments, which has been a relief to all stakeholders. 

Hybrid equity instruments aim to prevent the use of financial instruments masquerading as equity when they have debt-like characteristics. Dividends received by qualifying hybrid equity instruments would then be reclassified as income. The current anti-avoidance framework, which uses anti-avoidance criteria and rules to assess whether a preference share has debt-like characteristics, has, however, been circumvented by structuring preference shares in a manner that falls outside the ambit of section 8E of the Income Tax Act 58 of 1962 – usually by extending the period in which these preference shares may be redeemed. The true intention of the anti-avoidance provision is then defeated without achieving any positive results for the fiscus. 

The amendment proposed in the Bill to redefine hybrid equity instruments aimed to rectify this avoidance and align these types of instruments with their economic substance. The Bill proposed that any instruments categorised as financial liability in the annual financial statements of the issuer in accordance with the International Financial Reporting Standards would constitute a hybrid equity instrument. 

Had the proposed amendments been adopted, using preference shares as a financial tool would have lost much of its tax attractiveness. Although the Bill proposal sought to bring South Africa into line with global best practices, the proposal to broaden the ambit of hybrid equity instruments would be detrimental to the currently strained economic climate and weaken the investment competitiveness in South Africa.

Stakeholders were alarmed by the proposal, arguing that it would make preference shares unfeasible as a financing tool or instrument. This sparked concerns about possible interruptions to investment activity and delays in ongoing transactions.

Following the concern raised by stakeholders, the Minister of Finance, on the advice of National Treasury and the South African Revenue Services, has retracted the proposal to promote certainty and to avoid a negative impact on current financing. The retraction, however, does not mean that hybrid equity instruments are out of the limelight. It merely allows National Treasury and SARS time to consider a more balanced tax approach. 

The National Treasury has affirmed that all pertinent and affected stakeholders will be consulted during the development of any future proposals about the taxation of hybrid equity instruments. The PH Attorneys Tax Advisory team intends to submit comments accordingly. 

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