The 2025 Draft Taxation Laws Amendment Bill (and explanatory memorandum thereto) was published for comment on 16 August 2025. Among other proposals, there are proposed amendments to the provisions of section 8E of the Income Tax Act. In terms of section 8E certain dividends are deemed to be income in the hands of the holder and are therefore not exempt from tax in the hands of such holder. In order to fall into the provisions of section 8E it is necessary, amongst others, that the dividend arises in respect of a "hybrid equity instrument". The proposed changes include amendments to the definition of a "hybrid equity instrument".
The current provisions of section 8E mainly apply to preference shares and the preference share market relies on these provisions not finding application since otherwise this results in tax asymmetry with the issuer of the preference shares not obtaining a tax deduction and the holder being taxed on the preference share dividend.
Current criteria which result in the classification of a share or equity instrument as a hybrid equity instrument, for example concepts of a "date of issue" and a three year redemption date have been removed, and the definition of hybrid equity instrument is proposed to be replaced to link the classification of the instrument/share to the IFRS treatment thereof. In essence, any share or financial instrument that is classified as a financial liability in the annual financial statements of the issuer in accordance with IFRS would qualify as a "hybrid equity instrument". The proposed amendments (if entered into law) come into operation on 1 January 2026 and apply in respect of years of assessment commencing on or after that date.
Taxpayers who are holders of preference shares and/or equity instruments should consider whether they wish to make any submissions to National Treasury on the draft bills given the far-reaching implications of these proposed changes. The draft Bills are open for public comment until 12 September 2025.
The ENS Tax team is available to assist with technical analysis or preparing submissions to National Treasury ahead of the 12 September 2025 deadline.
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