INTM551100 - Hybrids: financial instruments (Chapter 3): conditions to be satisfied: condition C

Condition C of s259CA TIOPA 2010 requires an objective judgement: is it reasonable to suppose that, if certain chapters of Part 6A (or equivalent non-UK legislation) did not apply, there would be a relevant deduction/non-inclusion mismatch in relation to the payment or quasi-payment?

The test here is whether a relevant deduction/non-inclusion mismatch would arise if Chapter 3 and Chapters 5 to 10 of Part 6A TIOPA 10 (or any equivalent non-UK legislation) did not apply. For example, if Chapter 5 can also apply to the arrangement at issue, then Chapter 3 has priority, because counteraction under Chapter 3 is given priority over all other chapters except Chapter 4 (S259A(20)(b)).

In determining whether Condition C is satisfied, it is necessary to apply the rules in s259CB to determine whether there is a relevant mismatch (see INTM551230) and to determine its amount. If there is a mismatch, it will only be subject to counteraction if all four conditions are satisfied.

Reasonable to suppose

There is no definition of the term ‘reasonable to suppose’ in Part 6A. The phrase will take its ordinary meaning. It does not require either party to know how the transaction has been treated by the counterparty but only that, given the facts and circumstances, it would be reasonable to conclude that a mismatch may or may not arise.

The inclusion of this phrase is intended to assist in the application of Condition C (whether it is reasonable to suppose that there would be a hybrid or otherwise impermissible deduction/non-inclusion mismatch). Parties to the transaction should take all reasonable actions to establish whether a mismatch is likely to arise, taking account of the relevant tax laws of the territories involved. It is not necessary for the parties to await final resolution of the relevant tax returns, nor do the parties need to make disproportionate enquiries.

Other conditions not satisfied

Where it is clear that one of the conditions will not be satisfied, for example, because the financial instrument is not a hybrid financial instrument and is between unrelated parties, it should not be necessary to make enquiries to establish whether there may be a mismatch. On the other hand, it may be necessary to make enquiries if the same financial instrument is part of an over-arching arrangement within Chapter 11.

No mismatch possible

In other cases, it may be clear that the terms or other features of a financial instrument could not lead to a hybrid mismatch. In these cases, the parties to the financial instrument may conclude that it is reasonable to suppose that no mismatch could arise, and that it is unnecessary to provide full details of their corporate structure and financing arrangements to test this.

Group transactions

Where the parties to a financial instrument are related because they are in the same group, it is reasonable to expect that relevant information would be shared between the parties to establish if a mismatch arises.