South Africa’s Taxation Laws Amendment Act, 2012, includes provisions that revise the tax treatment of debt reduction transactions entered into on or after 1 January 2013.
Since the objective of the new tax reduction rules is to make it easier for companies (especially companies that are financially distressed) to alleviate group debts in a tax neutral fashion, the rules are complex. Taxpayers should take proper advice before embarking on any debt reductions.
South Africa’s tax rules also provide that interest may be re-characterized as dividends if the intra-group debt contains features of equity capital. Limitations on the deductibility of interest are also imposed in the case of loans taken out to acquire shares. The restriction on the tax deduction for interest will also apply in the case of loans between an exempt company and a resident person, to deal with situations where a tax deduction could be obtained for interest paid while the interest received is exempt from tax.
