INTM559100 - Hybrids: imported mismatches (Chapter 11): overview
Chapter 11 of Part 6A TIOPA 2010 contains provisions relating to so called imported mismatches. Chapter 11 applies counteractions to deny deductions, either fully or partially, when the payment made by a payer within the charge to Corporation Tax is part of an arrangement that results in an overseas hybrid mismatch (a ‘relevant mismatch’ for the purposes of Chapter 11).
The amount of the deduction denied is computed taking into account the UK company’s share of the relevant mismatch on a just and reasonable basis and a counteraction is only made where certain specified conditions, are met.
Example
- X Co (resident in Country X) lends to Y Co (resident in Country Y), using a hybrid financial instrument that results in a deduction for Y Co and no taxable income for X Co – a hybrid mismatch
- Y Co then makes a plain vanilla loan to UK Co (resident in the UK). UK Co has a deduction for the interest payment to Y Co, and Y Co includes the interest receipt in its ordinary income – no mismatch arises
- Y Co sets its own deduction from the hybrid financial instrument with X Co against the interest income from UK Co – so the net position is no effective taxation of the interest from UK Co
Chapter 3 concerning hybrid financial instruments does not counteract the hybrid mismatch because UK Co is party to a non-hybrid loan with Y Co. The imported mismatch rules in Chapter 11 will counteract the hybrid mismatch in the UK, if these arrangements are part of an over-arching arrangement.