INTM550580 - Hybrids: definition of key terms: hybrid entities, residence, investors and investor jurisdiction

Hybrid entity

An entity is hybrid if it meets conditions A and B at s259BE.

Condition A is that

  • the entity is treated as a person for tax purposes under the law of any territory

Condition B is that

  • the entity’s income or profits are treated by any territory wholly or partly as taxable income or profits of a different person, or
  • the entity is treated as part of another entity in a territory different to that mentioned in condition A

For example, a UK company which has elected to be disregarded for US tax purposes under the check the box regime will satisfy condition B.

Hybrid entities within Part 6A will include

  • those where applying the domestic law of two territories to the general characteristics of the entity leads to different outcomes as to whether the entity should be regarded as opaque or transparent for tax purposes
  • those where a territory’s domestic law treats an entity of a specific type in a certain manner for tax purposes and that treatment is not followed under the domestic law of other territories

For example, the income and gains of a UK Limited Liability Partnership (LLP) that carries on a business are treated as transparent under UK tax law. Other territories may treat a UK LLP in line with its form, as a body corporate, and regard it a distinct taxable entity in its own right

  • those where a territory’s domestic law allows certain entities to determine whether they are to be treated as opaque or transparent for tax purposes

For example, the US tax code allows entities to make an election to be treated as transparent or opaque for tax purposes under their check the box rules

Residence

For the purposes of Chapters 8 and 11, residence in a territory is deemed to constitute tax residence where the relevant jurisdiction has no concept of tax residence 259B(5) with effect from 1 January 2018.

Investor and investor jurisdiction

The investor in a hybrid entity is determined by reference to which part of Condition B is satisfied

  • if the income and profits of the hybrid entity are treated as those of a different person, the different person is an investor in the hybrid entity
  • if the hybrid entity is regarded as part of a different entity for tax purposes, the latter entity is the investor in the hybrid entity

The investor jurisdiction is the territory in which the investor is within charge to tax.