- If not considered to be
carrying on a trade, could the foreign exchange gains and
losses on foreign debt instruments be considered to be
The foreign exchange gains and losses would not be considered to be interest. However, section 24I(3) provides for an inclusion in or deduction from a taxable income of any person contemplated in sub-section (2) (which includes any company) any “exchange differences” in respect of an “exchange item”. An “exchange item” includes amounts owed in respect of a foreign currency.
- What is the impact on
deductibility of interest that is incurred in regards to borrowings
to fund capital or operating expenditure?
In order for interest to be deductible in terms of section 24J(2), it must be incurred in the production of income as part of a trade. Interest incurred in respect of amounts borrowed in order to fund working capital or operating expenditure is generally deductible in terms of these provisions.
- Section 24JB(2A): what if the
realised gains and losses are attributable to the change in the
credit risk of the issuer as opposed to the financial liability?
Does that mean you can't include or deduct, or does that mean
you revert to section 24J?
Amounts that do not fall into the provisions of section 24JB(2) or section 24JB(2A)/(2B) would then be tested against the other relevant sections in the Income Tax Act, including section 24J. In particular, section 24JB(3) should not preclude any deduction/inclusion in terms of another section if the relevant amount simply falls outside of the ambit of section 24JB.
- Let's say you are
dealing with a Credit Linked Note (“CLN”) and it falls
within the provisions of section 24JB. Would the interest
withholding tax rules apply to that CLN? Can you rely on the
definition of interest in section 24J to determine if the interest
payable in terms of the CLN is in fact interest for purposes of
interest withholding tax legislation? In other words, how does
section 24JB interact with the interest withholding tax
The interest withholding tax provisions would generally not apply on the basis that the relevant interest would be paid to the foreign person by a bank. However, if the CLN is issued by, for example, an entity which is not a bank but is still a “covered person”, then the interest withholding tax rules would still apply in respect of the interest paid to the foreign person by the issuer.
- Interest paid by banks is
exempt from interest withholding tax. What if interest is payable
on notes listed on the JSE by a bank? Would the exemption that
applies in respect of interest paid by banks still apply?
The interest would then be exempt from interest withholding tax in terms of the provisions of section 50D(1)(a)(i)(bb) as well as section 50D(1)(a)(ii).
- How does SARS look at
interest-free cross-border loans between non-connected parties?
Also, are there specific disclosure requirements? Does SARS enquire
about commerciality of the loan? What would SARS' evaluation
requirements be around commerciality of interest free cross border
The transfer pricing rules should then not apply in respect of such loans and therefore the provisions of section 31(2) of the Income Tax Act would not be relevant. However, it would still be necessary to consider whether, for example, the donations tax provisions, the provisions of section 7 of the Income Tax Act and/or the provisions of section 64E(4)(a) of the Income Tax Act may apply.
It would also be necessary to test whether, from an anti tax-avoidance perspective, a tax benefit arises for any party as a consequence of the interest-free nature of the loan as well as the purpose relating to the non-charging of interest in these circumstances. The principle set out in the Brummeria case would also have to be considered in circumstances where the interest-free loan is provided as quid pro quo for goods or services provided to the lender.
Originally published 02 July, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.