It has often been a bone of contention between taxpayers and the revenue authorities as to whether a shareholders' loan should attract interest at market‑related rates in circumstances where the shareholders' loan has been intended to provide subordinated funding to the offshore company. More often than not such shareholders' loan is used to fund the start-up operations of the offshore entity and it is not expected that the loan will be serviced for the foreseeable future.

It has now been recognised by National Treasury that these types of loans more often than not function as additional share capital and that the purpose is to provide for a more flexible use of capital. One should therefore not automatically insist upon a market‑related interest rate that applies to these types of loans. In particular, it has been proposed that these types of loans should be treated as share capital in line with the decision to treat certain forms of debt as shares.

Written by Emil Brincker, Director, National Practice Head, Tax, Cliffe Dekker Hofmeyr