This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Partnership Manual

Mixed member partnerships and international aspects: Hybrid entities and tax arbitrage

A hybrid entity is one:

  • that is recognised as a person under the tax code of any territory


  • whose 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.

As described at PM41100, it is possible that an entity may be treated as transparent by one tax jurisdiction but as opaque by another. For example, the US tax rules allow members of partnerships with separate legal personality, such as Scottish Limited Partnerships, to choose whether the entity is taxed as a company or a partnership through a “check the box” election. Such a mismatch of treatment may be exploited to gain a tax advantage; this is known as ‘tax arbitrage’. Anti-avoidance rules exist to counter such arrangements. Detailed guidance is available at INTM596000 onwards. It is important to be aware of the possibility of tax arbitrage when reviewing partnerships with international aspects as these often have the potential to be hybrid entities.