835AH Interpretation (Chapter 4).

(1) In this Chapter—

“financial instrument” includes—

(a) securities, within the meaning of section 135(8),

(b) shares in a company and similar ownership rights (not being securities) in entities other than a company,

(c) futures, options, swaps, derivatives and similar instruments that give rise to a financing return,

(d) an arrangement where it is reasonable to consider that the arrangement is equivalent to an arrangement for the lending of money, or money’s worth, at interest, and

(e) hybrid transfers;

“hybrid transfer” means an arrangement to transfer a financial instrument where the underlying return on that instrument is treated, for tax purposes, as derived by more than one of the parties to the arrangement;

“financial trader” means an enterprise that has entered into a financial instrument as part of a business which involves regularly buying and selling financial instruments on that enterprise’s own account;

“on-market hybrid transfer” means a hybrid transfer—

(a) that is entered into by a financial trader in the ordinary course of its trade, which includes the business of buying and selling financial instruments, and

(b) in respect of which the financial trader is required by the payer territory concerned to include, for the purposes of that territory’s tax laws, as trading income all amounts received in connection with the transferred financial instrument concerned;

“financing return” , in relation to a financial instrument, includes—

(a) dividends and manufactured payments,

(b) interest, including any discounts or amounts which would be treated as interest under Part 8A, notwithstanding that no election is made under section 267U,

(c) the amount of payments that are equivalent to interest under an arrangement described at paragraph (d) of the definition of “financial instrument” , and

(d) the underlying return referred to in the definition of “hybrid transfer” ;

“manufactured payment” has the same meaning as it has in Chapter 3 of Part 28.

(2) For the purposes of this Chapter—

(a) a corresponding amount relating to a payment under a financial instrument shall not be treated as included under paragraph (a)(i) of the definition of “included” in section 835Z(1) where, under the tax laws of the payee territory, the amount that is charged to foreign tax is subject to any reduction computed by reference to the way the payment to which the corresponding amount relates is characterised under those laws, and

(b) a corresponding amount relating to a payment under a financial instrument shall not be treated as included under paragraph (a)(i) of the definition of “included” in section 835Z(1) unless—

(i) the corresponding amount is included in a tax period which commences within twelve months of the end of the tax period in which the payment is deducted (in this paragraph referred to as the “first-mentioned period” ), or

(ii) it would be reasonable to consider that—

(I) the corresponding amount will be included in a tax period subsequent to the first-mentioned period, and

(II) the terms applicable to the payment are those that would apply to a transaction made at arm’s length.