CANNING OF PROPOSED CHANGES TO PREFERENCE SHARE FUNDING WELCOME
- BEE NEWS
- Sep 18
- 3 min read
Kgolo Qwelane | 17 September 2025
Tax changes would have rendered preference share funding unattractive and obsolete as a funding tool.
The halt by the government on the proposed tax changes to the treatment of preference share funding in the 2025 Draft Taxation Laws Amendment Bill is to be welcomed.
This is a relief regarding mergers & acquisitions activity, as the changes would have caused lower investment returns for BEE investors, reduced the secondary market for BEE deals and created a more difficult BEE deal-making environment.
The proposed framework would have harmed the tax treatment of dividend payments on preference shares, removing the only viable source of finance for equity transactions and adversely affecting BEE deals in SA.
According to the BBBEE Commission, BEE transactions with a gross value of R660bn were registered in 2017-24. Of these concluded BEE deals only the net value (after settlement of associated funding) would end up in participants’ hands.
Broad-based participation in BEE schemes
While early BEE transactions primarily benefited a few key individuals, they have since become broader and more inclusive. Hundreds of thousands of black beneficiaries have participated in broad-based schemes in the form of employee share ownership plans (Esops) — such as Shoprite, Absa, Harmony and Valterra — and retail schemes such as Vodacom YeboYethu, MultiChoice Phuthuma Nathi, SAB Zenzele, MTN Zakhele Futhi, Sasol Inzalo and Barloworld Khula Sizwe.
Many of these schemes caused significant value being generated for many citizens. Kumba’s Envision Esop saw eligible employees receive share units that entitled them to dividend payouts twice a year and a final pretax payment of about R576,000 each when the scheme was unwound in 2011.
How preference share funding works
BEE transactions are typically funded through a combination of entry discounts, equity contributions from the BEE parties, external funding (largely through preference share funding) and vendor funding from the sponsor company to cover the shortfall.
At the end of the BEE transaction term, sufficient shares are sold to settle the outstanding funding, with only the balance representing a “profit” for the BEE investor.
Successful BEE deals are characterised by the following: strong share price performance, competitive funding rates and long transaction terms.
Consequences of the proposed tax amendments
The proposed changes in the 2025 Draft Taxation Laws Amendment Bill regarding preference shares would have seen preference share dividends (previously exempt from tax) become taxable in the hands of the recipients/funders without a corresponding deduction at the preference share issuer level.
Considering SA tax law does not generally allow for a tax deduction of interest when a loan is used to finance share acquisitions, these tax amendments would have significantly curtailed a major source of equity financing for share transactions.
Good news for investors and economic growth
By putting an end to the proposed changes to preference share funding existing deals, BEE investors will no longer be subject to an estimated 37% increase in funding costs and new deals will no longer be charged at a higher funding rate from inception.
This is good news, as the tax changes would have rendered preference share funding unattractive and obsolete as a funding tool, discouraging investment, potentially harming economic growth, reducing taxes associated with M&A transactions and resulting in unintended consequences for the thousands of citizens who would otherwise benefit from BBBEE schemes.
‘Disclaimer - The views and opinions expressed in this article are those of the author(s) and not necessarily those of the BEE CHAMBER’.