INTM551170 - Hybrids: financial instruments (Chapter 3): counteraction and distribution exemption rules

The hybrid mismatch rules do not contain a priority order for considering the application of other legislation. In general the hybrid rules will need to be considered whenever a mismatch within scope of Part 6A arises, unless the application of other rules removes the mismatch entirely, see INTM550080.

Where a payment or quasi-payment is made under, or in connection with, a financial instrument for which a deduction is claimed by the payer but the payment is treated as a distribution under the law of the payee jurisdiction, there is overlap between the hybrid mismatch rules and the UK’s distribution exemption rules in Part 9A of the Corporation Tax Act 2009 (and equivalent rules in overseas jurisdictions). Therefore, although there is no statutory provision requiring it to be considered in priority, the distribution exemption provisions may be considered before applying the hybrid mismatch rules.

Primary response

The primary counteraction in relation to a hybrid mismatch under a financial instrument is that if the payer is within the charge to corporation tax in the UK for the payment period, s259CD applies to reduce the payer’s claim for a deduction from income by an amount equal to the mismatch.

An exception to this is where the overseas territory has rules equivalent to the UK’s distribution exemption rules in Part 9A of Corporation Tax Act 2009 (specifically the UK’s rules at s931B(c) and s931D(c) CTA 2009), removing the distribution’s exemption where a deduction is allowed to a resident of any territory in respect of that distribution. Where a distribution is brought back into charge through such a provision in another jurisdiction, the UK will not usually deny the deduction to the payer.

All such cases should be referred to Base Protection Policy Team, BAI for consideration.

Secondary response

The secondary counteraction in relation to a hybrid mismatch under a financial instrument is that if a payee is within the charge to corporation tax in the UK, s259CE may apply to treat a relevant amount of the mismatch as income of the payee in the counteraction period.

However, if the payment is treated as a distribution within the terms of Part 9A CTA 2009 and a deduction is allowed in respect of the payment, the UK will usually apply the Part 9A rules and bring the distribution into charge rather than apply the counteraction in s259CE.