Introduction

In the lifecycle of a growing business, it is not uncommon for companies to rely on shareholder or third-party loans to fund operations and expansion. However, as businesses evolve, the continued existence of debt on the balance sheet may become inefficient or restrictive—particularly where the company seeks to reduce financial pressure or strengthen its equity position. Converting a loan into shares offers a practical solution by transforming debt into ownership, thereby improving the company’s financial standing while aligning stakeholder interests. This article explores the key legal and practical considerations applicable to a loan-to-share conversion.

Corporate Compliance

A critical component of any loan-to-share conversion is ensuring compliance with the Companies Act No. 71 of 2008 (“Companies Act”) and the company’s own constitutional framework.

A key component of a loan-to-share conversion is the issuance of new shares by the company concerned to the creditor.

In terms of the Companies Act, the board of directors may resolve to issue shares at any time, provided that such shares are authorised in terms of the company’s Memorandum of Incorporation (“MOI”).

In the case of private companies, existing shareholders generally enjoy pre-emptive rights to subscribe for new shares in proportion to their existing shareholdings, unless such rights are limited or excluded by the MOI.

The board must determine that the shares are issued for adequate consideration. In a loan capitalisation, the loan claim itself constitutes the consideration.

Certain share issuance transactions may require shareholder approval by way of special resolution, including where shares are issued to directors (current or future), prescribed officers (current or future) or related or inter-related persons to the company or to the directors or prescribed officers or any of their nominees, or where the transaction results in the issuance of shares equal to or exceeding 30% (thirty percent) of the voting power of a class of shares.

Importantly, companies must also consider their constitutional documents, including the MOI and any shareholders’ agreement. These documents may impose additional requirements, including, but not limited to, restrictions on share issuances, approval thresholds, or procedures relating to pre-emptive rights and changes in shareholding.

Tax Considerations

In the context of a loan-to-share conversion, section 19 of the Income Tax Act No. 58 of 1962 (“Income Tax Act”) is particularly relevant for income tax purposes.

Essentially, section 19 of the Income Tax Act states that a company can become liable to pay income tax on any “debt benefit” it receives as a result of the conversion of the debt owed into shares.

A debt benefit arises:

• where the creditor did not hold shares in the company prior to the conversion, the amount by which the face value of the loan before conversion exceeds the increase in market value of the shares held by the creditor as a result of the conversion; and
• where the creditor did hold shares in the company prior to the conversion, the amount by which the face value of the loan before the conversion is higher than the market value increase of the shares held by the creditor before and after the conversion, as a result of the conversion.

Where the conversion is implemented on a value-for-value basis, no debt benefit should arise and no adverse income tax consequences for the company should follow.

Section 19, however, contains specific exclusions. Of particular relevance to loan capitalisations where shares are issued to reduce debt, the debt benefit provisions should not apply to the extent that:

• the company and the creditor form part of the same group of companies; or
• no interest is being converted into shares.

From an interest perspective, where the loan is interest-free, no section 24J implications should arise. However, if interest is charged, section 24J of the Income Tax Act should be considered.

The issuance of shares will not attract:

• capital gains tax consequences, in that it does not qualify as a disposal;
• securities transfer tax consequences, in that it does not qualify as a transfer; or
• value-added tax consequences, in that it constitutes a financial service and is an exempt supply.

From a donations tax perspective, where the conversion takes place at market value, no deemed donation should arise.

Practical Considerations

From a practical perspective, broader commercial implications should also be considered, including the impact on ownership dilution, control dynamics, and future funding strategies.

Conclusion

Converting a loan into shares can be an effective mechanism to restructure a company’s balance sheet, reduce financial pressure, and align investor interests with long-term growth. However, such conversions require careful legal, tax, and commercial consideration. Properly drafted agreements and a clear understanding of the implications are essential to successfully implement a loan-to-share conversion.

VDMA’s team of experts is available to assist you and your business with structuring and implementing loan-to-share conversions, including the drafting of all necessary agreements and supporting documentation.

Published 7 April 2026