Commentary

D4.706 Hybrid deduction/non-inclusion arrangement—qualifying conditions

Corporate tax
Corporate tax | Commentary

D4.706 Hybrid deduction/non-inclusion arrangement—qualifying conditions

Corporate tax | Commentary

D4.706 Hybrid deduction/non-inclusion arrangement—qualifying conditions

The four hybrid arrangements that are targeted by the legislation have rules that are very similar in scope and phraseology (with obvious modifications as necessary). These are the rules governing hybrid financial instruments, hybrid transfers and hybrid entity payers / payees. The legislation sets out in detail what falls within the ambit of the rules, but essentially there will be a 'hybrid or other non-deduction/mismatch' in relation to a financial instrument, transfer arrangement or hybrid payer / payee arrangement if the transaction has been engineered such that a deduction exceeds the corresponding income recognition. There are also detailed provisions setting out how the mismatch is to be calculated1.

An arrangement will fall within these anti-hybrid rules if the following conditions are met2:

  1.  

    (a)     a payment is made in connection with a financial instrument3/hybrid transfer arrangement4/hybrid payer arrangement5/hybrid payee arrangement6

  2.  

    (b)     the payer/hybrid payer is within the charge to corporation tax for the payment period or the payee / investor in a hybrid payee is within the charge to corporation tax for an accounting period which falls (in whole or in part) within the payment period7. In addition, for hybrid payee arrangements this condition will be met if the hybrid payee is a limited liability partnership8

  3.  

    (c)     it is reasonable to suppose there would be a hybrid deduction / non-inclusion mismatch in relation to the payment9

  4.  

    (d)     the following conditions are met:

    1.  

      (1)     it is a 'quasi-payment' (ie one where there is a deduction to the payer

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