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HMRC internal manual

International Manual

Arbitrage: legislation and principles - qualifying schemes for deductions cases: schemes involving hybrid entities

A scheme that includes a hybrid entity is a qualifying scheme. A hybrid entity is defined in s236 TIOPA 2010 as an entity that:

  • is recognised as a person under the tax code of any territory; and
  • its income or expenses are also treated under the same or a different tax code as the income or expenses of one or more other persons.

“Any territory” means any territory that is relevant to the taxation of the entity because it asserts some degree of taxing rights over the entity or any of its participators (e.g. the partners in a partnership). It is not relevant to consider how the entity would be regarded by every conceivable territory.

An example of an entity that may be a hybrid entity is a limited partnership. The UK does not recognise a limited partnership as existing independently of its partners for the purposes of determining on whom the tax charge falls, and taxes the partners on their share of partnership income as though it arose to them directly. Many other tax codes, however, view a limited partnership as a taxable entity in its own right, and tax it directly on its income.

Controlled foreign companies (CFC) are not considered to be hybrid entities solely because their profits are (or are treated as if they are) attributed to another person under Controlled Foreign Companies rules (s236 TIOPA 2010). This point is illustrated in INTM598170.

A permanent establishment (“PE”) will not normally be an entity in its own right and so will not of itself constitute a hybrid entity. However it is possible that a PE may be used as a part of a scheme that is a qualifying scheme for other reasons. For example, if a UK company enters into a foreign partnership, the partnership income may represent income of the PE. If another jurisdiction recognises the partnership as a taxable person, then the partnership is a hybrid entity.