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Elements of an imported hybrid mismatch (part 2)

Published 17 December 2025

The imported hybrid mismatch rules are contained in Chapter 11 of Part 6A TIOPA 2010. They refer to cross-border arrangements where a hybrid mismatch arises in another jurisdiction. The taxable benefit of the mismatch is imported for UK tax purposes via a series of arrangements. This happens when a UK entity makes a deductible payment to another group entity. The payment is part of a wider set of arrangements that include a hybrid mismatch arising elsewhere in the group structure.

The Chapter 11 Imported Mismatches provisions are a specific aspect of the UK’s hybrid mismatch rules. They were introduced to implement The Organisation for Economic Co-operation and Development (OECD) Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final report recommendations. This aims to tackle tax planning strategies exploiting gaps and mismatches in the tax rules between different jurisdictions. By targeting imported hybrid mismatches, these provisions reinforce the integrity of the UK’s tax base. This ensures that it is not indirectly eroded by mismatch arrangements that take place outside the UK across multinational structures. These are a mechanical set of rules which apply where the conditions are met. There is no commercial purpose or similar condition in the rules.

Chapter 11 of Part 6A TIOPA 2010 applies to counteract an imported hybrid mismatch if all the conditions set out at s259KA are met. These conditions are outlined in INTM559200 – Hybrids: imported mismatches (Chapter 11): conditions to be satisfied: contents. In summary they will be met when:

• an allowable deduction arises for Corporation Tax purposes for a payment or quasi-payment made by a payer within the charge to Corporation Tax
• the payment is part of a wider series of arrangements which, it is reasonable to suppose, includes an overseas double deduction or a deduction/non-inclusion mismatch arising from the use of hybrid entities or instruments that exploit differences in the tax rules between jurisdictions or branch arrangements which give rise to excessive permanent establishment (PE) deductions
• the payee in receipt of the payment giving rise to the hybrid mismatch (or the company with the permanent establishment, in respect of an excessive PE deduction) is in the same control group as the UK payer or the arrangement in question are part of the legislation refers to as a ‘structured arrangement’
• for payments from 10 June 2021, that it is reasonable to suppose that none of the other parties in the series of arrangements could be capable of counteracting the mismatch — this is where the non-UK party is located in an OECD mismatch compliant territory and so has hybrid mismatch rules that could counteract the mismatch

If the conditions at s259KA are satisfied, s259KC counteracts the overseas hybrid mismatch by denying the UK payer’s taxable deduction in proportion to the extent to which the UK funds the overseas mismatch.

Key concepts  

There are six key concepts when undertaking compliance analysis for imported hybrid mismatches. Understanding them aids UK businesses to determine whether the imported mismatch conditions apply.

The six key concepts are:

• payments and quasi-payments
• reasonable to suppose
• series of arrangements
• OECD mismatch compliant
• control groups
• structured arrangements

Payments and quasi-payments

Payments and quasi-payments are defined at s259BB. This meaning should be applied when considering the imported hybrid mismatch rules. These concepts are widely defined to catch a broad range of transactions within the scope of the hybrid mismatch provisions. For example, the payment of financial costs such as interest as well as royalties and payments for cost of goods sold.

A payment refers broadly to any transfer of monetary value which results in an allowable taxable deduction when calculating the payer’s taxable income for Corporation Tax purposes. Deductions for chargeable gains purposes are not within scope of the provisions. 

A quasi-payment is a concept introduced to extend the scope of the hybrid mismatch rules. It includes circumstances that produce the taxable effect of a monetary payment but may not meet the conventional definition.

An amount is broadly considered to be a quasi-payment when:

• its payer is entitled to an allowable deduction when calculating its taxable profits
• it is reasonable to suppose that ordinary income would arise to one or more persons — as a result of the circumstances giving rise to the allowable deduction when applying the relevant assumptions set out at s259BB (4)

The relevant assumptions are outlined in detail at INTM550540 – Hybrids: definition of key terms: payment and quasi-payment, securitisation companies.

In summary, these assume that any payee would:

• be a person resident and carrying on a taxable trade in the payer’s jurisdiction
• have adopted the same accounting approach as the payer  —  in respect of the circumstances giving rise to the deduction when considering whether ordinary income would arise to them

Quasi-payments often arise in complex financial arrangements and can include: 

• accruals that generate tax deductions without a corresponding taxable receipt, for example accrued but unpaid interest
• an interest free convertible loan note being treated as issued at a discount that qualifies for finance relief

Deductions deemed to arise for tax purposes under the law of the payer jurisdiction are not quasi-payments, if the circumstances giving rise to the deduction do not involve the creation or amendment of economic rights existing between the payer and a payee.

For example, a notional deduction granted by a territory for deemed interest on an interest free loan would not constitute a quasi-payment. This is because it does not arise from the terms of the loan itself but rather from the operation of the territory’s tax rules.

Reasonable to Suppose

Many conditions in the hybrids legislation include a ‘reasonable to suppose’ test to determine if conditions apply. ‘Reasonable to suppose’ is not defined in the legislation itself. It takes on its ordinary meaning as interpreted at INTM550640 - Hybrids: definition of key terms: reasonable to suppose.

Rather than requiring absolute certainty of how a counterparty will treat a transaction, this test:

• allows a rational, justifiable and credible view of what is likely
• is intended to help taxpayers make a compliant Self Assessment without waiting for all uncertainties to be resolved

What is ‘reasonable to suppose’ when assessing whether part 6A applies will depend on:

• the specific detail of the arrangement
• the facts or information which are already known or available
• ability to reasonably obtain further information

This test does not require the taxpayer to know with absolute certainty the final tax treatment in other jurisdictions. Instead it considers whether, based on the evidence and information reasonably available, it would be reasonable to conclude that a mismatch may or may not arise.

Taxpayers should therefore adopt a risk-based approach and take all reasonable actions which are proportionate and appropriate to the transaction to establish whether a mismatch is likely to apply. This should take into account the relevant tax laws of the territories involved.

Series of arrangements

A series of arrangements is defined at s259KA(5) as a number of arrangements where each is entered into in pursuance of, or in relation to, another arrangement (the over-arching arrangement). 

This concept is critical for determining if a hybrid mismatch has been imported into the UK via a structure or series of transactions involving one or more intermediary steps. 

A series does not need to be formally documented as a single transaction or structure. The arrangements themselves may occur between multiple entities, jurisdictions and at different times. What matters is that the overall effect of the arrangements is intended to produce a particular outcome when taken together and viewed as a whole. 

When considering if a UK entity is a party to a series of arrangements that ultimately includes a hybrid mismatch elsewhere, its important to test if:

• there is a direct or indirect link between a UK transaction and an offshore mismatch
• there are intermediate arrangements between that transaction and the mismatch
• they form part of a coherent commercial plan or structure

OECD mismatch compliant

From 10 June 2021 onwards, the UK does not need to apply its own mismatch counteraction where it is reasonable to suppose that a territory is both:

• OECD mismatch compliant
• capable of considering a counteraction under the law of that territory

This avoids double counteraction, ensuring only genuinely hybrid mismatches are targeted. 

Broadly, a mismatch can be capable of counteraction in a territory that is OECD mismatch compliant, if:

• the mismatch itself occurs in a territory that is OECD mismatch compliant
• a party to the series of arrangements that include the mismatch is in a territory that is OECD mismatch compliant

A territory is considered OECD mismatch compliant if it has fully implemented legislative rules that align with the OECD Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final report to neutralise hybrid mismatches. HMRC accepts that territories which have fully implemented the European Union’s Anti-Tax Avoidance Directive - ATAD 2 2017/952Directive are OECD mismatch compliant. Read Hybrid and other mismatches Anti-Tax Avoidance Directive.

Control groups

Control group is defined at S259NB and involves understanding and assessing the relationships between entities. This includes persons connected in, broadly, any of these three ways: 

• consolidation for accounting purposes — when those persons’ financial results are required to be consolidated in group accounts for a given taxable period

• participation condition — within six months beginning with a specific day, one party directly or indirectly participates in the management, control or capital of another, or a third party participates similarly in both

• 50% investment condition — one party holds a 50% investment in the other, or a third party holds a 50% investment in both

INTM550620 – Hybrids: definition of key terms: 50% investment and 25% investment provides a detailed definition of the 50% investment conditions.

In summary, a party is considered to hold a 50% investment in another entity if either:

• it possesses or is entitled to acquire at least 50% of that entity’s share capital
• it possesses or is entitled to acquire at least 50% of that entity’s voting power
• it is entitled to 50% of all its income, assets and entire share capital if they were distributed or disposed of

The guidance also addresses scenarios where individuals or entities are deemed to be ‘acting together’ to potentially increase a party’s percentage investment in another entity.  

Broadly, when two or more parties are considered to be acting together, then they are treated as a single investor in relation to another entity. This can happen when, there is an agreement, arrangement or understanding which results in them exercising rights or powers collectively in that entity.  

This concept ensures that collaborative arrangements are recognised when evaluating control. It does not require a formal legal agreement. This is a facts-based test and HMRC consider the overall relationship and behaviour of all parties involved.

Examples of acting together can include: 

• a group of investors jointly managing a fund
• family members or business partners coordinating investment decisions
• persons that are party to a shareholder agreement to vote or otherwise influence the affairs of an entity in a coordinated way

Structured arrangements

Broadly, an arrangement is a structured arrangement where either:

• it is reasonable to suppose that it is designed to secure a hybrid mismatch
• the terms of the arrangement are designed to share the economic benefit of the mismatch between the parties to that arrangement, or otherwise reflect an expected mismatch

The test of whether an arrangement is a structured arrangement is considering whether it is reasonable to suppose that the arrangement was designed to secure the mismatch, regardless of any other objective. For a useful definition read INTM550650 – Hybrids: definition of key terms structured arrangements.