MTT41430 - Particular entities and adjustments: Tax transparent entities: Reallocation of profits and taxes to hybrid entities

The adjusted profits of the owner of a hybrid entity may include amounts relating to that hybrid entity. When calculating the effective tax rate for MTT purposes, those amounts are to be pushed down to the hybrid entity, where certain conditions are met.

This is set out in section 167 of Finance (No.2) Act 2023.

In practice, this rule will rarely apply, as the owner of a hybrid entity will not typically recognise accounting profits in relation to that hybrid entity (though it may recognise taxable profits in relation to that entity).

However, this provision also provides the basis for the reallocation of covered taxes from an owner to a hybrid entity under section 178(1A) of the Act (see MTT41470).

Hybrid entity

A hybrid entity is a member of a group that:

  • is not regarded as tax transparent in the territory in which it is located, but
  • is regarded as tax transparent in the territory of a member of the group that holds an ownership interest in it (“G”).

See MTT41420 for guidance on the meaning of tax transparent.

Hybrid entity - Adjustment required

An adjustment is required where:

  • profits of a hybrid entity are reflected in the adjusted profits of G, and
  • the basis for the profits of the hybrid entity being reflected in the adjusted profits of G is that M (and any entities through which G holds its interest in M) is regarded as tax transparent in G's territory.

Those profits must be:

  • excluded from the adjusted profits of G, and
  • reflected in the adjusted profits of the hybrid entity.