UK: Anti-Hybrid Rules for Corporation Tax Released

Very similar to the rules proposed by the OECD, these rules are available here. The coming into force date is set for January 1st, 2017.

The HMRC explains:

“The measure implements the agreed Organisation for Economic Co-operation and Development (OECD) rules for addressing hybrid arrangements that give rise to hybrid mismatch outcomes and generate a tax mismatch. Mismatches can involve either double deductions for the same expense, or deductions for an expense without any corresponding receipt being taxable.

The measure neutralises the tax mismatch created by the hybrid arrangement by changing the tax treatment of either the payment or the receipt, depending on the circumstances. The rules are designed to work whether both the countries affected by a cross-border hybrid arrangement have introduced the OECD rules, or just one. This measure deals with mismatches in two ways, described as a ‘primary response’ and a ‘secondary response’.

In the case of double deductions, the primary response is to deny a deduction to the parent company. If this does not occur (because the tax law in the country in which the parent company is resident does not provide for this), the secondary response is to deny the deduction to the hybrid entity.

In the case of deduction/non-inclusion, the primary response is to deny a deduction to the payer. If this does not occur, the secondary response is to bring the receipt into charge for the recipient.

Hybrid mismatch outcomes can arise from both hybrid financial instruments and hybrid entities.

An example of a hybrid financial instrument would be one which allowed the payer to deduct an amount as interest, but allowed the receipt to be treated as an exempt dividend in the hands of the payee.

An example of a hybrid structure would be a partnership which is treated as transparent by one jurisdiction, but treated as opaque by another jurisdiction. The effect would be that one jurisdiction would apply its tax rules to the partnership, whilst the other would look through the partnership and apply its tax rules to the partners.

This measure targets hybrid mismatches in the following circumstances.

Deduction/non-inclusion outcomes involving:

  • Hybrid Financial Instruments
  • Hybrid Transfers
  • Hybrid Entity Payers
  • Hybrid Entity Payees

Double deduction outcomes involving:

  • Hybrid Entity Payers
  • Dual Resident Companies

The measure also includes rules to deter arrangements which attempt to circumvent the main hybrid mismatch rules by transferring a mismatch into a third jurisdiction – such arrangements are known as ‘imported’ mismatches. These additional rules deal with Double deduction or deduction/no inclusion imported mismatch outcomes involving:

  • Hybrid Financial Instruments
  • Hybrid Entity Payees
  • Hybrid Entity Payers”

More details are available here.

Just in time for the Holidays, HMRC also indicated that “a series of examples illustrating the application of the hybrid mismatch rules will be published on 22 December 2015.”

Robert Robillard, Ph.D., CPA, CGA, MBA, M.Sc. Econ.

Senior Partner, DRTP Consulting Inc.
514-742-8086; robertrobillard “at”

The convergence of DRTP Consulting’s tax, accounting and economics expertise makes a difference. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. DRTP Consulting Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. The opinions expressed in this blogpost are those of the author. Readers should seek advice and counsel from DRTP Consulting Inc. as required.

Posted by drtp On 14 December 2015