Policy paper

Corporation Tax: anti-hybrid rules

Updated 22 December 2015

This policy paper was withdrawn on

This information has been updated please read Corporation Tax: anti-hybrids rules policy paper.

This information has been updated please read Corporation Tax: anti-hybrids rules policy paper.

Who is likely to be affected

Large multinational groups with UK parent or subsidiary companies involved in cross-border or domestic transactions involving a mismatch in the tax treatment within the UK or between the UK and another jurisdiction.

General description of the measure

The measure implements the agreed Organisation for Economic Co-operation and Development (OECD) rules for addressing hybrid arrangements that give rise to hybrid mismatch outcomes and generate a tax mismatch. Mismatches can involve either double deductions for the same expense, or deductions for an expense without any corresponding receipt being taxable.

The measure neutralises the tax mismatch created by the hybrid arrangement by changing the tax treatment of either the payment or the receipt, depending on the circumstances. The rules are designed to work whether both the countries affected by a cross-border hybrid arrangement have introduced the OECD rules, or just one. This measure deals with mismatches in two ways, described as a ‘primary response’ and a ‘secondary response’.

In the case of double deductions, the primary response is to deny a deduction to the parent company. If this does not occur (because the tax law in the country in which the parent company is resident does not provide for this), the secondary response is to deny the deduction to the hybrid entity.

In the case of deduction/non-inclusion, the primary response is to deny a deduction to the payer. If this does not occur, the secondary response is to bring the receipt into charge for the recipient.

Hybrid mismatch outcomes can arise from both hybrid financial instruments and hybrid entities.

An example of a hybrid financial instrument would be one which allowed the payer to deduct an amount as interest, but allowed the receipt to be treated as an exempt dividend in the hands of the payee.

An example of a hybrid structure would be a partnership which is treated as transparent by one jurisdiction, but treated as opaque by another jurisdiction. The effect would be that one jurisdiction would apply its tax rules to the partnership, whilst the other would look through the partnership and apply its tax rules to the partners.

This measure targets hybrid mismatches in the following circumstances.

Deduction/non-inclusion outcomes involving:

  • Hybrid Financial Instruments
  • Hybrid Transfers
  • Hybrid Entity Payers
  • Hybrid Entity Payees

Double deduction outcomes involving:

  • Hybrid Entity Payers
  • Dual Resident Companies

The measure also includes rules to deter arrangements which attempt to circumvent the main hybrid mismatch rules by transferring a mismatch into a third jurisdiction - such arrangements are known as ‘imported’ mismatches. These additional rules deal with Double deduction or deduction/no inclusion imported mismatch outcomes involving:

  • Hybrid Financial Instruments
  • Hybrid Entity Payees
  • Hybrid Entity Payers

Policy objective

The measure will neutralise the tax effect of hybrid mismatch arrangements in accordance with the recommendations of Action 2 of the G20/OECD Base Erosion and Profit Shifting (BEPS) project.

This measure seeks to tackle aggressive tax planning where, within a multinational group, either one party gets a tax deduction for a payment while the other party does not have a taxable receipt, or there is more than one tax deduction for the same expense.

The aim is to eliminate the unfair tax advantages which arise from the use of hybrid entities and instruments, and thereby encourage businesses to adopt less complicated cross-border investment structures.

Background to the measure

In 2013 the OECD and G20 countries adopted a 15-point Action Plan to address BEPS. The Action Plan aims to ensure that profits are taxed where the economic activities generating the profits are performed and where value is created.

This measure implements the recommendations of Action 2 of the BEPS project -‘Neutralising the effects of hybrid mismatch arrangements’.

BEPS refers to tax planning strategies that exploit gaps and mismatches in the tax rules of different countries to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but where the tax rates are low resulting in little or no overall corporate tax being paid.

In response to Action Point 2, agreement was reached on a set of rules designed to ensure that multinational entities can no longer derive tax benefit from mismatch arrangements using hybrids entities or hybrid financial instruments.

The government announced its intention on 5 October 2014 to introduce domestic legislation to give effect to the recommendations of Action 2. A consultation document was published at Autumn Statement 2014 inviting responses from stakeholders. This measure has been informed by consideration of responses to the consultation, by further engagement with stakeholders, and by publication of the final OECD report.

Detailed proposal

Operative date

The measure applies to payments made on or after 1 January 2017 involving hybrid entities or instruments which give rise to a hybrid mismatch outcome.

Current law

UK resident companies, and non-resident companies carrying on a trade in the UK through a permanent establishment, are chargeable to corporation tax on their profits. The computation of those profits is, on the issue of a relevant notice, subject to anti-arbitrage legislation set out in Part 6 of Taxation (International and Other Provisions) Act 2010 (TIOPA).

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to substitute Part 6A for Part 6 of TIOPA 2010.

The effect of this change is that hybrid mismatch outcomes involving hybrid entities and financial instruments will be countered through the primary response, which is a disallowance of deductions where the UK is the payer jurisdiction in respect of a deduction/non-inclusion mismatch. Where the UK is the payee jurisdiction, and the primary response has not been applied in another jurisdiction, then the UK will bring the receipt into charge.

Where a double deduction arises, the UK will deny the deduction where it is the parent jurisdiction or, if the deduction is not denied in the parent jurisdiction, the UK will deny the deduction as the payer jurisdiction.

Summary of impacts

Exchequer impact (£m)

2015 to 2016 2016 to 2017 2017 to 2018 2018 to 2019 2019 to 2020
- +15 +70 +85 +90

These figures are set out in Table 2.1 of Autumn Statement 2014 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2014.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

A behavioural adjustment is made to reflect evidence of attrition in the yield from previous anti-avoidance measures, as groups attempt to mitigate the tax impact.

Impact on individuals, households and families

This measure will not directly affect individuals or households. It is not expected to impact on family formation, stability or breakdown.

Equalities impacts

There are no impacts on any groups which share a protected characteristic.

Impact on business including civil society organisations

This measure is not expected to have any impacts on businesses or civil society organisations who are undertaking normal commercial transactions. It will only affect businesses that use artificially contrived tax planning arrangements to exploit mismatches in international tax systems.

Operational impact (£m) (HMRC or other)

There will be no significant operational impacts for HMRC and additional costs are expected to be negligible.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns and kept under review through regular communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact:

Yasmin Ali on Telephone: 03000 543326 or email: yasmin.ali@hmrc.gsi.gov.uk

Andy Preece on Telephone: 03000 586074 or email: andrew.preece@hmrc.gsi.gov.uk