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South Africa: Limitations against excessive interest tax deductions


Peter Dachs

The National Treasury and the South African Revenue Service have introduced a discussion document on proposed limitations against excessive interest tax deductions. The discussion paper deals with four issues.

Firstly, hybrid debt instruments with substantive equity features. The proposal is that distributions on these instruments should be treated as dividends.

Secondly, connected person debt. The proposal in the discussion paper is to provide a limitation on interest deductions in respect of interest paid by one company to another entity within the same accounting group or in circumstances where the debt owed is guaranteed by an entity within the same accounting group. These rules will only apply in circumstances where the interest received by the lender is taxed at a low or zero rate.

Thirdly, transfer pricing considerations in relation to connected person debt entered into on a cross-border basis. It is proposed that a potential safe harbour is created in relation to such debt provided various criteria are met.

Fourthly, acquisition debt. This has been high on National Treasury's agenda for several years. It is proposed that where assets are acquired using the rollover relief provisions a particular formula will provide a limitation on the quantum of interest which will be deductible by the purchasing entity.

It is likely that there will be significant discussion generated from the proposals and the final legislation may not be enacted on the basis set out in the discussion paper. However the points made therein should be noted by affected taxpayers.

Peter Dachs (

ENS – Taxand

Tel: +27 21 410 2500

Fax: +27 21 410 2555


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