The Taxation of Company Distributions in Respect of Hybrid Instruments in South Africa: Lessons from Australia and Canada

Potchefstroom Electronic Law Journal/Potchefstroomse Elektroniese Regsblad

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Title The Taxation of Company Distributions in Respect of Hybrid Instruments in South Africa: Lessons from Australia and Canada
Creator Tredoux, Liezel G
Van der Linde, Kathleen
Subject hybrid equity instrument
Hybrid instrument
hybrid debt instrument
third-party backed share
non-equity share
non-share equity
term preferred share
collateralised share
dividend rental agreement
taxable preferred share
taxation of equity investment
taxation of debt instruments
debt bias
economic double taxation
tax avoidance
Description Tax legislation traditionally distinguishes between returns on investment paid on equity and debt instruments. In the main, returns on debt instruments (interest payments) are deductible for the paying company, while distributions on equity instruments (dividends) are not. This difference in taxation can be exploited using hybrid instruments and often leads to a debt bias in investment patterns. South Africa, Australia and Canada have specific rules designed to prevent the circumvention of tax liability when company distributions are made in respect of hybrid instruments. In principle, Australia and Canada apply a more robust approach to prevent tax avoidance and also tend to include a wider range of transactions, as well as an unlimited time period in their regulation of the taxation of distributions on hybrid instruments. In addition to the anti-avoidance function, a strong incentive is created for taxpayers in Australia and Canada to invest in equity instruments as opposed to debt. This article suggests that South Africa should align certain principles in its specific rules regulating hybrid instruments with those in Australia and Canada to ensure optimal functionality of the South African tax legislation. The strengthening of domestic tax law will protect the South African tax base against base erosion and profit shifting through the use of hybrid instruments.
Publisher Faculty of Law, North-West University, South Africa
Date 2021-01-12
Type info:eu-repo/semantics/article
Peer reviewed article
Format application/pdf
Source Potchefstroom Electronic Law Journal; Vol 24 (2021); 1-36
Language eng
Rights Copyright (c) 2021 Liezel G Tredoux, Kathleen Van der Linde

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