The applicant`s main concern, it seems, was that the underwriting of new shares and the subsequent repayment of the loan would be considered a reduction in debt under Law 58 on income tax 1962 (law) and that a repayment would be made in the hands of the applicant. This is mainly due to the fact that the loan was applied to deductible expenses. On the other hand, there appears to be concern that the merger would be a debt reduction within the meaning of section 12A of the eighth scheme of the Act and that this would result in a reduction in authorized capital gains tax expenditures. The provisions of section 8F of the Income Tax Act, 58 of 1962 (the “Law”) regulate “hybrid debt securities.” Overall, interest collected from the date a paid debt is classified as a hybrid debt instrument is considered a dividend as declared by the company that received such an amount (i.e. the borrower) to the person who received that amount (i.e.dem lender). In addition, the borrower will be denied a tax deduction for these interest. In Labat, the court indicated that it may be possible to structure the transaction differently, so that compensation is the application. However, since the contracts have not been simulated, the Tribunal must take the transaction at face value. The Tribunal has therefore never ruled on whether compensation can be applied in the context of loan capitalizations. The provisions of Section 8F, which must be considered in the above circumstances, include the provisions of paragraph (b) of the definition of a hybrid debt.

In this regard, an interest debt issued by a corporation may constitute a hybrid debt instrument if the obligation to pay an amount owed is deferred because the market value of the borrower`s assets is not less than the amount of that borrower`s debt. However, the application of paragraph (b) the definition of a hybrid debt is not necessarily limited to subordination agreements.