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Complex or special transactions (part 4)

Published 17 December 2025

This part sets out complex or special transactions. These need greater care and are likely to require specialist support.  We have provided additional guidelines on these types of transactions. This is to help UK businesses identify them and plan for compliance work.

Mergers, acquisitions, restructuring and changes in business model

Changes in group structure may create transactions between the UK business and new group members. This can include new payments for goods, services, or the use of intellectual property. The UK business must identify links between these payments and any payments made by the payee and others in the payment chain.

Significant changes to a group’s ownership or supply chain can result from external transactions like mergers or acquisitions. However, they may also be the result of changes to how the existing corporate group operates or is structured. The UK risk lead should ensure they have visibility on both types of restructuring.

The UK risk lead will need to understand the transactional steps taken to give effect to the change and the impact on the UK business. If the activity took place over a period of time, it will not be sufficient simply to understand the endpoint.

For example the acquisition of a UK group has involved the assumption of debt by the UK. The final structure does not contain an imported hybrid mismatch. However it is possible that the initial or interim funding structure contained elements which gave rise to a mismatch arrangement. Counteractions may be required for the initial or interim period.

Where changes to the group’s ownership or corporate structure result in US shareholders owning UK entities — establish the US check the box status of:

• UK subsidiaries

• any overseas entities interposed in the ownership chain between the UK and the US

This is for the purposes of assessing the risks of:  

• a core mismatch for instance under Chapter 9 (hybrid entity double deduction mismatches) or Chapter 5 (hybrid payer deduction/non-inclusion mismatches)

• an imported mismatch involving any non-UK entities that are both in US-UK ownership chain and any over-arching arrangements concerning the UK

Similarly, if there is a change of ownership to a US headed group, it will be necessary to clarify if there have been any changes to the check the box status made for UK subsidiaries and any foreign entities considered to be part of an overarching arrangement alongside the UK.

Partnership structures, private equity or similar holding structures 

HMRC frequently observe a UK corporate group owned by a partnership or equivalent transparent investment vehicle. There are often multiple investors, some or all of which may be ‘acting together’ for the purposes of the imported hybrid mismatch rules. Read ‘control group’ section in Elements of an imported hybrid mismatch (part 2).  Some of these investors may be individuals, other companies, pension funds or other types of legal entity.  This type of structure is frequently used in private equity. It may also be used by professional service firms and other businesses controlled by partnerships of individuals. The following comments refer largely to private equity and similar investment holding structures.

A key feature of these types of structure is an investment manager or similar corporate body. The investment manager is appointed or contracted to the arrangement. They will have the key information on the investors — that is needed for the UK businesses hybrids analysis. The investment manager often sits outside of the ownership chain. This can result in information on the investors not being in the power or possession of the UK corporate group.

The income tax treatment of transactions by individual investors may be relevant to the identification of a mismatch outcome and there may be sensitivities around obtaining this information. 

The tax treatment of transactions by corporate or other investors is dependent on their residence and tax status under local law.  For instance, whether they are exempt from tax because they are a charity or pension fund. 

Multiple layers of transparent entity may be in the ownership chain above the corporate group. This means a payment can give rise to tax effects for an individual or entity distant to the parent company of the corporate group.

For corporate groups with US investors, it is best practice for the UK risk lead to have an understanding of the check the box status of entities within the corporate group. HMRC expects this knowledge will help assess the risk of double deduction at both investor and corporate group entity level.

Similarly, there should be an understanding within group tax of transactions that result in a deduction/non-inclusion mismatch outcome. In many private equity ownership structures this will be limited to a small number of transactions. Often these will be the financial transactions which facilitated the firm’s investment in the group. The understanding should extend to whether this arises because of hybridity or not. It should also extend to whether it is reasonable to suppose that — the tax rules which apply to non-UK corporate entities in the series of arrangements mean the — mismatch is capable of counteraction in another territory. Read INTM559250 – Hybrids: imported mismatches (Chapter 11): conditions to be satisfied: condition E for guidance.

To identify any mismatch outcomes it is necessary to understand the tax treatment at investor level. The investment manager is likely to be the person best able to obtain this information. The UK risk lead should provide full and precise instructions on what information is required of the investors to address these questions.  

While not directly relevant to Chapter 11, it is worth noting that a reasonable understanding of how the investor base is composed will also allow the UK risk lead to assess whether Chapter 13A (‘Special Provision concerning Transparent Funds’) would apply to prevent counteraction under one of the direct hybrid mismatch rules.

Whether Chapter 11 applies is dependent on a number of reasonable to suppose tests, outlined in Elements of an imported hybrid mismatch (part 2) — for instance in respect of the existence of a hybrid mismatch, or whether any such mismatch is capable of counteraction. As explained at INTM550640 — Hybrids: definition of key terms: reasonable to suppose, this does not require knowledge of the actual position, but a rational, justifiable and credible view of the likely outcome or position.

Where the investment manager is unable or unwilling to provide the facts related to the investors that are relevant to Chapter 11 or other Chapters of the hybrids rules — it will not be possible to form a view. If the level of factual information available is considered insufficient for the UK risk lead to arrive at a rational, justifiable and credible view of the likely outcome or position, then this should be disclosed on the relevant company tax return.

UK risk leads should monitor annually as the exit or introduction of investors may alter the assessment.

Permanent establishments and branches

Multinational enterprises global structures frequently contain permanent establishments (PE) or branches (including UK PE of foreign entities). This is common within the professional services firms and financial services sector.  

Imported hybrid mismatch risks may arise from excessive PE deductions. This is where the PE or branch makes a deductible payment to its head office with no corresponding inclusion of income in the head office. They may also arise on payments or quasi-payments to a company with a foreign PE. This is where there is a mismatch between deductibility for the payer and non-inclusion for the payee because the income arises in the PE rather than the head office territory.  

When considering a PE, you should consider the core hybrid chapters that are not directly aimed at PE but can also potentially apply. For example, a Chapter 5 (‘hybrid payer’ deduction/non-inclusion mismatch) could occur if there is a PE of a hybrid entity where the payment is not recognised as ordinary income in the payee jurisdiction. Which chapter applies to any transaction will depend on the facts and the exact cause of the hybrid mismatch.

Amongst the salient facts to identify when considering PE are:  

• the allocation of profit in a supply chain or other overarching arrangement that involves payments to a PE
• whether all the relevant profits have been allocated between the PE and its head office
• whether the PE income is subject to an exemption or other beneficial regime, and if so, how the regime operates in the context of the rules on ordinary income, read INTM550560 - Hybrids: definition of key terms: ordinary income - HMRC internal manual - GOV.UK for more guidance
• where an excessive PE deduction is identified, whether there is also dual inclusion income (income taxable in both head office and PE jurisdictions) against which the deduction can be offset