INTM552140 - Hybrids: hybrid transfers (Chapter 4): conditions to be satisfied: condition E

There are three circumstances in which Condition E would be satisfied. These are

  • the payer is also the payee
  • the payer and payee are related, or
  • the hybrid transfer arrangement is a structured arrangement

The payer is also the payee

From a UK tax perspective this circumstance could happen (if at all) when the transaction takes place within a single entity.

The UK branch of a non-UK company enters into a repo transaction with its head office. The UK is assumed to respect the arrangement as an internal financing arrangement in attributing profits to the branch and therefore allows a tax deduction for the funding cost under the repo, giving rise to a quasi-payment.

Whilst it could be argued that there is not an actual transfer of securities, from the perspective of the foreign jurisdiction, the head office and branch are different entities and therefore there is a transfer within s259DB(3) enabling condition E to be satisfied. Further the branch and head office might hold securities through different nominees, in which case there is an actual transfer. Alternatively branch and head office might have separate accounts with a central securities depository (for instance Euroclear, Clearstream or SIX SIS Ltd.) which could reflect a change in ownership by means of book entries. This would be regarded by the markets as a transfer.

The branch is the payer and the head office is the payee, but the head office is not regarded as a distinct and separate person from the branch for the purposes of UK corporation tax. Both are parts of a single taxable company, even though the UK taxes only profits attributable to the UK permanent establishment (the branch).

If the head office jurisdiction takes a different approach and for tax purposes treats the UK branch as if it were a separate entity and the transaction as a sale and repurchase of securities even though it takes place within a single entity (the scenario imagined in s259BB(7)) and the foreign jurisdiction does not treat the scenario as a financing arrangement and taxes the corresponding financing income as ordinary income, then the counteraction may apply.

This circumstance is satisfied where the payer and payee are related at any time in the period beginning with entry into the hybrid transfer arrangement and ending on the last day in the payment period. This is the last day of the tax period in the payer’s tax jurisdiction in which the payer gets a tax deduction giving rise to a quasi-payment (or makes a payment).

The meaning of related party is set out in s259NB, see INTM550610.

Where the payer of a substitute payment is a financial trader, entitled to a tax deduction for the payment in computing trading profits, the related party circumstance on its own is insufficient to lead to counteraction, see INTM552170.

The hybrid transfer is a structured arrangement

The definition of a structured arrangement is found in s259DA(7). See INTM552150 for further details.