D4.709 Hybrid deduction/non-inclusion arrangements—counteraction
Where the conditions detailed above are met, the counteraction essentially allows the UK to deny tax deductions, or limit their use, when a UK corporate taxpayer makes such a payment. This is the 'primary rule' and must be applied first. If the primary rule cannot counter the mismatch, the 'defensive rule' is to impose additional taxable income on the payee1.
Hybrid financial instruments and hybrid transfer arrangements
For hybrid financial instruments and hybrid transfer arrangements the following rules apply2:
(a) where the payer is within the charge to corporation tax for the payment period, the relevant deduction is reduced by the amount of the mismatch — this is the 'primary rule';
(b) if it is reasonable to suppose that the mismatch is not counteracted under (a) or an equivalent non-UK provision, or that a non-UK provision applies but does not fully counteract the mismatch, the payee is treated as having income arising (the 'defensive rule'). The defensive rule will apply if the payee is within the charge to corporation tax for an accounting period some or all of which falls within the payment period.
For the purposes of (b) above, if the payee is the only payee, the 'relevant amount' is treated as income for the accounting period coinciding with the payment period or, if there is no such accounting period, the first accounting period falling wholly or partly within the payment period. If there is more than one payee, the relevant amount is divided between
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