The IRAS has issued the third edition of its e-Tax Guide on the Income Tax Treatment of Hybrid Instruments, clarifying how such instruments are classified as debt or equity for tax purposes and confirming that distributions from hybrid instruments issued by registered business trusts are tax-exempt for investors. 

RF Report

The Inland Revenue Authority of Singapore (IRAS) has released the third edition of its e-Tax Guide on the Income Tax Treatment of Hybrid Instruments on 26 December 2025.  The guide outlines how hybrid instruments are classified as debt or equity for tax purposes.

Key updates in this edition include:

  1. Clarification on how the Comptroller of Income Tax determines whether a hybrid instrument is treated as debt or equity.
  2. Confirmation that distributions from hybrid instruments issued by a registered business trust (RBT) are tax-exempt for investors.

This e-Tax Guide edition sets out the income tax treatment of hybrid instruments, including the factors generally used to determine whether they are debt or equity instruments for income tax purposes.

Paragraphs 5.2 and 5.3 of the guide are: 

5.2 In determining the characterisation of a hybrid instrument, the Comptroller of Income Tax (the “CIT”) takes the approach that the characterisation involves an examination of the legal rights and legal obligations created by the instrument. This would involve examining the relevant legal documents such as the offering document, subscription agreement, etc., and taking into consideration the terms stated in the legal documents. A hybrid instrument is generally characterised as equity if the legal terms of the instrument indicate ownership interests in the issuer.

5.3 Where applicable, the CIT would also consider factors other than the terms stated in the legal document when determining the characterisation of a hybrid instrument. In this regard, the legal terms and factors that the CIT would take into account could include the following:

(a) Nature of interest acquired

If the capital provided by an investor results in him acquiring shareholding and residual interest in the entity which issues the hybrid instrument, it suggests that the instrument is an equity instrument.

(b) Right to participate in issuer’s business

A right for an investor to participate in the business operation of the issuer pursuant to the investor’s investment in such instrument suggests that the instrument is an equity instrument.

(c) Voting rights conferred by the instrument

If a hybrid instrument provides an investor with voting rights at general meetings, it implies that the instrument is an equity instrument.

(d) Obligation to repay the principal amount

The presence of a fixed repayment date in a reasonably foreseeable future in a hybrid instrument that requires the issuer of such instrument to unconditionally repay the principal amount on or by that date, regardless of the business performance of the issuer (i.e. whether it is deriving any profits), suggests debt characterisation of an instrument. In the absence of a fixed repayment date, the existence of a step-up feature may imply that the issuer has an obligation to repay the principal amount. In contrast, if the repayment is conditioned on the financial well-being of the issuer of such instrument and there is no fixed repayment date or step-up feature in the hybrid instrument, it implies that the instrument is an equity instrument.

(e) Payout: Where –

  • there exists a non-contingent obligation (i.e. not dependent on any event, condition or circumstance) for an issuer to make a periodic distribution of a pre-determined amount to the investor, regardless of the business performance of the issuer (e.g. whether it is deriving any profits); and
  • the distribution is cumulative,
  • it supports debt characterisation of an instrument. On the other hand, where the payment of the distribution is at the discretion of the issuer, or when the distribution is non-cumulative or dependent on the issuer’s profits, it suggests that the instrument is an equity instrument.
  • Notwithstanding that a distribution on an instrument is at the discretion of the issuer and is non-cumulative, a dividend stopper / restrictive clause in the terms of the instrument could motivate the issuer to make periodic distribution payments on the instrument. In particular, where the issuer or its relevant related company is a listed company or a REIT, there is general expectation from the shareholders and unitholders to receive dividends or distributions. If so, the presence of a dividend stopper / restrictive clause could tilt the instrument towards being regarded as a debt.

(f) Investor’s right to enforce payment:

If an investor has an unconditional right to enforce the payment of distribution and repayment of the principal amount, it supports debt characterisation of an instrument. Conversely, if the hybrid instrument does not provide the investor with any means to enforce the payment of distribution and repayment of the principal amount, it suggests that the instrument is an equity instrument.

(g) Ranking for repayment in the event of liquidation or dissolution If –

  • the right of an investor to repayment of the principal amount is subordinated to that of general creditors or to holders of subordinated debt of the issuer; or
  • the investor is required to bear the current or future losses of the issuer by way of either a write-down of the principal amount of such instrument or conversion to ordinary shares of the issuer,
  • this suggests that the instrument is an equity instrument.

(h) Classification by other regulatory authorities

If any other regulatory authority in Singapore does not regard the hybrid instrument as debt for regulatory purpose, it implies that the instrument is an equity instrument. For example, a regulatory authority may determine that the issuance of the hybrid instrument would not affect any borrowings limit that may be imposed on the issuer if the regulatory authority regards the instrument as equity.