Hybrid Equity Instrument Tax Treatment Proposals Withdrawn

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On 3 September 2025, National Treasury issued a media statement announcing the withdrawal of a key proposal in the 2025 draft Taxation Laws Amendment Bill (TLAB) relating to the definition of a "hybrid equity instrument."

The Proposed Changes

The original intention behind the proposed amendment was to shift from a rules-based to a principle-based approach in classifying preference shares for tax purposes. The aim was to ensure that instruments with debt-like characteristics, such as fixed dividends or mandatory redemption dates, are taxed as debt, aligning with international best practices. This would have closed tax loopholes where preference shares were used to claim dividend exemptions, effectively reducing tax liabilities inappropriately.

Reasons to Withdraw

However, stakeholders across the financial and legal sectors raised serious concerns about the proposal’s broad wording. Many argued that it could eliminate preference shares as a viable financing tool, potentially disrupting existing transactions and delaying investment activity.

In light of these concerns, and to prevent any negative impact on capital markets, the Minister of Finance, on the advice of National Treasury and SARS, has decided to withdraw the proposal from the current draft TLAB. Treasury has confirmed that any future structural changes to the tax treatment of hybrid equity instruments will undergo a full consultative process with stakeholders before any new legislation is tabled.

Public comments on the remaining provisions of the 2025 draft TLAB remain open until 12 September 2025.