2025 Budget – Proposed changes to tax treatment of forex on specific foreign debt

Does your company pay interest to an offshore group company? Have you considered whether you should limit your interest and forex deduction in terms of s23M?

In short, s23M limits the tax deduction that can be claimed on “interest” by a SA debtor company on debts owed to targeted foreign group creditors who are not subject to tax or fully subject to tax in SA on the interest received. “Interest” as defined in s23M includes foreign exchange losses on qualifying debt. The likely reason for forex losses to be treated in a similar way as interest is that they form an inherent part of the cost of borrowing.

The formula used to determine the allowable tax deduction for qualifying “interest' is calculated as: Interest received by the SA debtor plus 30% of its “adjusted taxable income” minus interest incurred on other debt (not subject to s23N).

From the 2025 Budget, two important proposed updates in relation to s23M includes the following:

1. Forex gains and losses to be excluded from “adjusted taxable income” calculation.

   It is proposed that the “interest” to be taken into account in calculating the “adjusted taxable income” would be s24J interest. The wider definition of “interest” in section 23M, which includes forex losses, will continue to be used to determine the deductions that may be limited using the 30% formula. This means that both the interest and forex element of the cost of borrowing on targeted foreign debt will be limited.

   
   

2. Clarification to indicate that forex losses can be limited even when there is no forex accrual in the hands of the foreign creditor.

   The 2025 Budget proposes clarification regarding the interest limitation rules that applies to the debtor when the interest income is not taxed in the hands of a foreign creditor.  

It is proposed to make it clear that if the underlying debt is subject to section 23M, the forex losses in respect of the underlying debt will also be limited.  

In other words, even if a loan is denominated in a foreign currency and no foreign exchange gain is therefore realised by the creditor, the foreign exchange losses recognised by the South African debtor will be subject to the limitation in section 23M.

It is advisable to take these proposals into account when performing interest limitation calculations in advance of filing your income tax returns. Early planning will enable you to effectively manage any implications arising from the anticipated changes.

Should you require guidance or support, please feel free to contact the VAT IT SA team.