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HMRC internal manual

International Manual

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Arbitrage: practical guidance - examples demonstrating the application of the arbitrage legislation: Example 9 - hybrid entity definition

Example 9 - hybrid entity definition

Use this link to view example 9 - hybrid entity definition diagram

This example is intended to illustrate the meaning of hybrid entity, and does not consider the purpose of the scheme or whether Condition C is met, which will depend upon the facts and circumstances.

Facts: The UK HoldCo is held by a company in a low tax jurisdiction that is a Controlled Foreign Company “CFC” by its parent company’s jurisdiction (Code A). For the purposes of calculating the CFC tax in Code A, the UK HoldCo is taxed as a branch of the CFC.

The UK HoldCo makes a loan to a UK non-active business that is also a CFC for the purposes of Code A taxation. The Code A CFC regime operates by deeming the profits of a CFC to be the profits of its parent company.

Analysis:

The UK non-active business is regarded as a person under UK tax law, and its profits are treated as the profits of the Code A HoldCo only as a result of the Code A CFC regime. However a company is not a hybrid entity if the only reason its profits are treated as the profits of another person is that its profits are subject to CFC legislation (F2A05/SCH3/PARA3(2)). Therefore the UK non-active business is not a hybrid entity.

The UK HoldCo is regarded as a person under UK tax law and is subject to UK taxation. Its profits are also taxed as the profits of the low tax CFC for the purposes of calculating the amount of profits imputed to the Code A HoldCo by the Code A CFC regime in respect of the low tax CFC. This CFC tax is a relevant tax because it has a character similar to corporation tax.

Although the subsequent imputation of the combined profits to Code A results from the CFC regime, the attribution of the UK HoldCo’s profits to the CFC is not the consequence of a CFC imputation rule; it results instead from other Code A tax law provisions as they apply to the CFC, which treat the UK HoldCo as a branch of the CFC.

Therefore the UK HoldCo is a hybrid entity, but the UK non-active business is not. The UK HoldCo is party to transactions forming part of the scheme, and so it is a qualifying scheme.

Therefore this is a qualifying scheme and so Condition A is met. Whether the legislation actually applies depends upon the other conditions - in particular, Condition C, which is not considered in this example.