The South African Revenue Service has issued Binding Private Ruling 424, confirming when interest incurred under section 24J of the Income Tax Act may be deducted on loan funding used to redeem preference shares and settle related dividends.
The South African Revenue Service (SARS) published Binding Private Ruling (BPR) 424 on 6 February 2026, setting out its view on the deductibility of interest incurred on loan funding used to redeem preference shares and to settle current or accumulated preference share dividends under the Income Tax Act 58 of 1962.
The ruling concerns the interpretation and application of section 24J of the Act, as applicable on 12 December 2025, and is binding only between SARS and the Applicant, a resident company. It is published with the Applicant’s consent for general information and does not constitute a practice generally prevailing.
Transaction structure
The Applicant’s sole purpose is to develop and own a project. A resident commercial bank has offered a project finance facility to fund construction and initial start-up costs. Under the agreed funding structure:
- 40% of the funding will be provided through a Senior JIBAR Facility (the Initial Loan) to fund construction costs and initial start-up costs.
- 60% of the funding will initially be provided by the bank through the subscription for unsecured, redeemable preference shares (the Preference Shares), the proceeds of which will also fund construction and initial start-up costs.
The Preference Shares, together with any accumulated dividends, will later be redeemed using a Post-Construction Senior JIBAR Facility (the New Loan). Once this occurs, all funding provided to the Applicant will be in the form of senior debt.
The New Loan forms part of the funding facility from inception, as its terms were agreed alongside those of the Initial Loan and the Preference Shares, although drawdowns are only available once the Preference Shares become redeemable.
Security and terms
The Applicant’s obligations under the Initial Loan and the New Loan are secured by, among other measures, notarial bonds over assets, security cessions of debtors’ balances and third-party claims, bank accounts, insurance proceeds, guarantees and performance bonds, shares in the Applicant, and a subordination of shareholder claims. A special purpose vehicle (the Security SPV) will be established to secure these payment obligations.
Security for the Applicant’s obligations under the Preference Shares is limited to a cession in security of its non-interest-bearing claim against the Security SPV for residual proceeds following enforcement.
The Preference Shares have a seven-year term and carry a preferential, cumulative cash dividend, payable quarterly in arrears after a dividend grace period from financial close to the scheduled commercial operations date (SCOD). Dividends accrue during this period, with a partial deferment for three years after SCOD. No Preference Share may be redeemed until all accumulated, accrued and unpaid dividends have been paid.
Scheduled redemption begins no earlier than three years and one day after the last drawdown under the Preference Share Facility and no later than three years after SCOD. Any outstanding Preference Shares may be redeemed on the Final Redemption Date, being seven years after issue, using proceeds from the New Loan.
The New Loan may be drawn to fund unpaid dividends and redemption amounts from SCOD plus three years up to seven years after SCOD. It has a 20-year term following SCOD, an availability period of seven years, and bears interest at the rate specified in the finance facility, subject to an interest roll-up period of between six and seven years after financial close.
Ruling outcome
SARS ruled that:
- The Applicant is entitled to deduct interest, determined in accordance with section 24J, on the New Loan to the extent that the interest does not relate to amounts used to fund the payment of current or accumulated dividends in respect of the Preference Shares, from the year of assessment in which the first drawdown occurs.
- No ruling is issued on the application of section 8E or section 8EA in respect of the Preference Shares.
Validity
The binding private ruling is valid for 10 years from 12 December 2025 and was issued under SARS’ Advance Tax Rulings programme.
