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Convertible debt instruments
The Taxation Laws Amendment Act, 31 of 2013 (the TLAA) introduced a new section 8F into the Income Tax Act with effect from 1 April 2014. This new section is designed to reduce the opportunity for the creation of equity instruments that are artificially disguised as debt instruments (hybrid debt instruments). Taxand South Africa investigates this amendment and the consequences for multinationals.
In the provisions of section 8F, a 'hybrid debt instrument' is defined as any instrument in respect of which a company owes an amount during a year of assessment. This is if the company is entitled to convert or excahnge that amount for shares in that company or in any other company that forms part of the same group of companies as that company. However, as an exception, the TLAA have inserted "unless the market value of those shares is equal to the amount owed in terms of the instrument at the time of conversion or exchange".
National Treasury initially indicated that one of the purposes of section 8F was to focus on debt-labeled instruments that enabled conversion into shares.
Also published in Thomson Reuters' Taxnet Pro, 8 May 2014