Revenue Note for Guidance

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Revenue Note for Guidance

PART 35C

HYBRID MISMATCHES

Overview

This Part implements Article 9 of the EU Anti-Tax Avoidance Directive (ATAD) as amended by ATAD2 and contains rules to counteract hybrid mismatches. The rules are referred to as anti-hybrid rules. The purpose of anti-hybrid rules is to prevent arrangements that exploit differences in the tax treatment of a financial instrument or an entity, under the tax laws of two or more jurisdictions, to generate a tax advantage. The tax advantage arising from this is referred to as a hybrid mismatch outcome.

CHAPTER 1

Interpretation and general (Part 35C)

Summary

Chapter 1 is the interpretation chapter and sets out the meaning of various concepts used in this Part.

835Z Interpretation

Summary

This section is the interpretation section for the Part. The definitions are mostly self-explanatory while others are defined by reference to other provisions in the Taxes Acts.

Details

(1) Definitions

“arrangement” has the same meaning as in the Controlled Foreign Company provisions (Part 35B section 835I) and includes –

  1. any transaction, action, course of action, course of conduct, scheme, plan or proposal,
  2. any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable by legal proceedings, and
  3. any series of or combination of the circumstances referred to in paragraphs (a) and (b),

whether entered into or arranged by one or two or more enterprises—

  1. whether acting in concert or not,
  2. whether or not entered into or arranged wholly or partly outside the State, or
  3. whether or not entered into or arranged as part of a larger arrangement or in conjunction with any other arrangement or arrangements,

but does not include an arrangement referred to in section 826;

“associated enterprise” is defined separately in section 835AA

“chargeable period” has the same meaning as it has in Part 41A and means an accounting period of a company or a tax period.

“controlled foreign company charge” has the same meaning as it has in Part 35B, Controlled Foreign Company provisions.

“deduction” means any amount, in respect of a payment, that can be taken into account in calculating the taxable profits or gains of an entity

“deemed payment” means the allocation of a payment, profit or gains between a head office of an entity and the permanent establishment of that entity or the allocation of a payment, profit or gains between two permanent establishments of the same entity

“Directive (EU) 2016/1164” means Council Directive (EU) 2016/1164of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, as amended by Directive (EU) 2017/952;

“Directive (EU) 2017/952” means Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries;

“domestic tax” means income tax, corporation tax (including a controlled foreign company charge) or capital gains tax;

“double deduction” means where the same payment gives rise to a tax deduction in two different territories

“double deduction mismatch outcome” shall be construed in accordance with section 835AD.

“dual inclusion income” means any amount that is included in both territories where the mismatch outcome has arisen

“enterprise” means an entity or an individual

“entity” means

  1. a person (other than an individual),
  2. an undertaking (other than an individual), or
  3. an agreement, trust or other arrangement,

that has legal personality in the territory in which it is established. Entity is purposely broadly drafted to include anything that has a legal personality in the territory in which it is established.

“financial instrument deduction without inclusion mismatch outcome” shall be construed in accordance with section 835AJ.

“foreign company charge” has the same meaning as it has in Part 35B; the Controlled Foreign Companies provisions.

“foreign tax” means a tax that is similar to domestic tax, meaning income tax, corporation tax (including a controlled foreign company charge) or capital gains tax, that is charged in another territory but does not include refundable withholding tax;

“hybrid entity” means—

  1. a person (other than an individual),
  2. an undertaking (other than an individual), or
  3. an agreement, trust or other arrangement,

which is treated as a chargeable person in respect of some or all of its profits or gains in one territory (i.e. an opaque entity in country X) but for the purposes of tax charged in another territory, some or all of its profits or gains are treated, as arising or accruing to another enterprise (in this Part referred to as “the participator”) (i.e. a transparent entity in country Y)

“included” in respect of a payment has a specific meaning in this Part. It refers to an amount of profits or gains arising from that payment, that is (a) to be regarded as taken into account in the taxable income of the payee or (b) that is subject to a controlled foreign company charge or a foreign company charge (as defined in the Acts).

When defining what amount is to be regarded as taken into account in the taxable income of the payee, a number of different scenarios are included depending on the tax status of the payee or the tax laws of the territory in which the payee is established. This is because ATAD specifically provides that (i) a mismatch outcome shall not arise where the payee is exempt from tax in the territory in which it is established and (ii) that the anti-hybrid rules should not affect the general features of the tax system of a Member State.

Accordingly, an amount is to be regarded as taken into account in the taxable income of the payee, as follows;

  1. where the payee is chargeable to tax on the amount (but does not include any amount, which is only chargeable to tax when it is remitted),
  2. where the payee is a pension fund, government body or other entity that is exempt from tax,
  3. where the payee is established in a territory, or part of a territory, that does not impose a foreign tax, or
  4. where the payee is established in a territory that does not impose a tax on payments from sources outside that territory (i.e. where the payee is established in a country with a territorial tax regime that does not impose a tax on payments sourced outside the country i.e. as opposed to a worldwide tax regime).

“investor” means an enterprise or the permanent establishment of an entity (other than the payer) who obtains a tax deduction in respect of a payment in the investor territory;

“investor territory”, in relation to a payment, means a territory, other than the payer territory, where the payment is deductible;

“mismatch outcome” means any or all of the following, as the context requires:

  1. a double deduction mismatch outcome;
  2. a permanent establishment deduction without inclusion mismatch outcome;
  3. a financial instrument deduction without inclusion mismatch outcome;
  4. a payment to a hybrid entity deduction without inclusion mismatch outcome;
  5. a payment by a hybrid entity deduction without inclusion mismatch outcome;

These terms are all construed in accordance with the relevant section. The language is taken from ATAD.

“payee”, in respect of a payment, means an enterprise or permanent establishment of an entity—

  1. which receives that payment or is treated as receiving that payment under the laws of any territory but does not include a situation where the payment is received in a fiduciary or representative capacity,
  2. which is a participator (the term is defined previously in the context of hybrid entity)
  3. which is treated as the beneficial owner of the payment under the laws of any territory, or
  4. on which a controlled foreign company charge or foreign company charge is made by reference to that payment;

“payee territory” means a territory in which a payee is established;

“payer” means—

  1. an enterprise, or
  2. the permanent establishment of an entity,

which obtains a tax deduction in respect of a payment in a payer territory;

“payer territory” means—

  1. where the payment is made by a hybrid entity or a permanent establishment, the territory in which the hybrid entity or permanent establishment is established, and
  2. in all other cases, the territory where the payment giving rise to the tax deduction is incurred, sourced or made;

“payment” means—

  1. a transfer of money or money’s worth, or
  2. a deemed payment (as previously defined);

“payment by a hybrid entity deduction without inclusion mismatch outcome” shall be construed in accordance with section 835AM.

“payment to a hybrid entity deduction without inclusion mismatch outcome” shall be construed in accordance with section 835AL

“permanent establishment deduction without inclusion mismatch outcome” shall be construed in accordance with section 835AG

“structured arrangement” means an arrangement involving a transaction, or series of transactions, under which a mismatch outcome (as defined) arises, where—

  1. the mismatch outcome is priced into the terms of the arrangement, or
  2. the arrangement was designed to give rise to a mismatch outcome;

“tax period” means—

  1. in respect of a charge to domestic tax, a chargeable period,
  2. in respect of a charge to foreign tax, a period equivalent to a chargeable period, or
  3. where the entity concerned is not charged to tax, the period for which financial statements are prepared.

(2) Where there is a reference in this Part to i) a provision of the law of another territory similar to this Part or ii) a provision that has a similar effect to this Part, or a provision of this Part, it shall include a provision that –

  1. gives effect to Directive (EU) 2016/1164,
  2. implements the Final Report on Neutralising the Effects of Hybrid Mismatch Arrangements published by the Organisation for Economic Cooperation and Development on 5 October 2015,
  3. implements the Final Report on Neutralising the Effects of Branch Mismatch Arrangements published by the Organisation for Economic Cooperation and Development on 27 July 2017, or
  4. otherwise neutralises a mismatch outcome.

(3) Where a word or expression is used in this Part and is also used in Directive (EU) 2016/1164 it shall have the same meaning in this Part as it has in the Directive.

(4) The territory in which an entity is established means –

  1. in respect of an entity
    1. where the entity is registered, incorporated or created in one territory but has its place of effective management in another territory, the territory in which it has its place of effective management and
    2. in all other cases where the entity is registered, incorporated or created
      and
  2. in respect of a permanent establishment the territory in which the permanent establishment carries on a business.

Relevant Date: Finance Act 2019