INTM552030 - Hybrids: hybrid transfers (Chapter 4): conditions to be satisfied: condition A
Condition A is met where there is a hybrid transfer arrangement in relation to an underlying financial instrument. The definition of financial instrument in s259N is wide and includes shares.
A hybrid transfer arrangement in relation to an underlying instrument includes
- a repo
- a stock lending arrangement, and
- any other arrangement
that provides for, or relates to, the transfer of a financial instrument where either the dual treatment condition is satisfied, or a substitute payment could be made.
The terms repo (see INTM552040) and stock lending arrangement (see INTM552050) are not defined, so take their normal commercial meanings.
An arrangement for the transfer of a financial instrument that would not ordinarily be regarded as a repo or a stock loan may still fall within the definition of a hybrid transfer arrangement. Where that arrangement may result in a deduction/non-inclusion mismatch it is within the definition of a hybrid transfer arrangement if either the dual treatment condition is met, or substitute payments could arise.
Dual treatment condition
The dual treatment condition (see INTM552060) is met in relation to an arrangement where
- the tax treatment of a person who is party to a transaction follows the economic substance of the agreement, that is, as if it were an agreement for the borrowing of money, and
- the tax treatment of another party to that transaction does not follow the same approach
Substitute payments
A substitute payment may be made where there is an arrangement for the transfer and transfer back of a security, or a delay in its transfer under contractual arrangements (see INTM552070). The actual recipient of a dividend or interest payment in respect of the financial instrument may be required to make a payment to the other party to the transfer, in effect to compensate that party for not receiving that dividend or interest payment.
A substitute payment may result in a deduction/non-inclusion mismatch where, for instance, the tax jurisdiction of the recipient of the substitute payment taxes it in an advantageous way (or not at all) as if it were the real dividend but the other jurisdiction allows a deduction for the substitute payment made.
Novations and other indirect transfers
S259DB(6) extends the definition of a transfer for arrangements other than repos and stock loans. This includes (but is not restricted to) novations of a financial asset or liability. A novation is a legal term describing contractual arrangements where a new obligation is substituted for the one that previously existed.
For example, where there is a transfer from P to Q, even if the original financial instrument held by P ceases to exist, so long as Q comes to have substantially the same rights or obligations in respect of a financial instrument as P had under the original instrument, this would be treated as a transfer.