F1PART 6AHybrid and other mismatches
CHAPTER 2Key definitions
Meaning of “tax”
259B“Tax” means certain taxes on income and includes foreign tax etc
1
In this Part “tax” means—
a
income tax,
b
the charge to corporation tax on income,
c
diverted profits tax,
d
the CFC charge,
e
foreign tax, or
f
a foreign CFC charge.
2
In subsection (1) “foreign tax” means a tax chargeable under the law of a territory outside the United Kingdom so far as it—
a
is charged on income and corresponds to United Kingdom income tax, or
b
is charged on income and corresponds to the United Kingdom charge to corporation tax on income.
3
A tax F5is outside the scope of subsection (2) if it—
a
is chargeable under the law of a province, state or other part of a country, or
b
is levied by or on behalf of a municipality or other local body.
F83ZA
A tax is not within paragraph (a) or (b) of subsection (2) so far as it is charged on income that—
a
has arisen to an entity that—
i
is not subject to the tax (as regards that income), and
ii
is, under the law of the territory referred to in that subsection, regarded as being a person for the purposes of the tax, but
b
is to be brought into account for the purposes of that tax by a different entity.
F23A
The payment of any withholding tax in respect of any amount is to be ignored for the purposes of this Part.
4
In this Part—
“CFC” and “the CFC charge” have the same meaning as in Part 9A (see section 371VA);
“foreign CFC charge” means a charge (by whatever name known) under the law of a territory outside the United Kingdom which is similar to the CFC charge (and reference to a “foreign CFC” is to be read accordingly).
F65
In any case where—
a
a person is resident in a territory outside the United Kingdom generally for the purposes of the law of the territory or for particular purposes under that law, and
b
the law of the territory has no provision for a person to be resident for tax purposes under its law,
any reference in Chapter 8 or 11 to a person's residence for tax purposes in the territory is to be read as a reference to the person's residence as mentioned in paragraph (a).
Equivalent provision to this Part under foreign law
259BAReferences to equivalent provision to this Part under the law of a territory outside the United Kingdom
1
A reference in this Part to provision under the law of a territory outside the United Kingdom that is equivalent to—
a
this Part, or
b
a provision of this Part,
is to be read in accordance with subsection (2).
2
The reference is to provision under the law of a territory outside the United Kingdom that it is reasonable to suppose—
a
is based on the Final Report on Neutralising the Effects of Hybrid Mismatch Arrangements published by the Organisation for Economic Cooperation and Development (“OECD”) on 5 October 2015 or any replacement or supplementary publication, and
b
has effect for the same, or similar, purposes to this Part or (as the case may be) the provision of this Part.
3
In paragraph (a) of subsection (2) “replacement or supplementary publication” means any document that is approved and published by the OECD in place of, or to update or supplement, the report mentioned in that paragraph (or any replacement of, or supplement to, it).
Payments and quasi-payments etc
259BBMeaning of “payment”, “quasi-payment”, “payer”, “payee” etc
1
In this Part “payment” means any transfer—
a
of money or money's worth directly or indirectly from one person (“the payer”) to one or more other persons, and
b
in relation to which (disregarding this Part and any equivalent provision under the law of a territory outside the United Kingdom) an amount (a “relevant deduction”) may be deducted from the payer's income for a taxable period (the “payment period”) for the purposes of calculating the payer's taxable profits.
2
For the purposes of this Part, there is a “quasi-payment”, in relation to a taxable period (the “payment period”) of a person (“the payer”), if (disregarding this Part and any equivalent provision under the law of a territory outside the United Kingdom)—
a
an amount (a “relevant deduction”) may be deducted from the payer's income for that period for the purposes of calculating the payer's taxable profits, and
b
making the assumptions in subsection (4), it would be reasonable to expect an amount of ordinary income to arise to one or more other persons as a result of the circumstances giving rise to the relevant deduction.
3
But a quasi-payment does not arise under subsection (2) if—
a
the relevant deduction is an amount that is deemed, under the law of the payer jurisdiction, to arise for tax purposes, and
b
the circumstances giving rise to the relevant deduction do not include any economic rights, in substance, existing between the payer and a person mentioned in subsection (2)(b).
4
The assumptions are that (so far as would not otherwise be the case)—
a
any question as to whether an entity is a distinct and separate person from the payer is determined in accordance with the law of the payer jurisdiction,
b
any persons to whom amounts arise, or potentially arise, as a result of the circumstances giving rise to the relevant deduction adopt the same approach to accounting for those circumstances as the payer, and
c
any persons to whom amounts arise, or potentially arise, as a result of those circumstances—
i
are, under the law of the payer jurisdiction, resident in that jurisdiction for tax purposes, and
ii
carry on a business, in connection with which those circumstances arise, in the payer jurisdiction.
5
In this Part—
a
references to a quasi-payment include all the circumstances giving rise to the relevant deduction mentioned in subsection (2)(a), and
b
references to a quasi-payment being made are to those circumstances arising.
6
In this Part “payee” means—
a
in the case of a payment, any person—
i
to whom the transfer is made as mentioned in subsection (1)(a), or
ii
to whom an amount of ordinary income arises as a result of the payment, and
b
in the case of a quasi-payment, any person—
i
to whom it would be reasonable to expect an amount of ordinary income to arise as mentioned in subsection (2)(b), or
ii
to whom an amount of ordinary income arises as a result of the quasi-payment.
7
For the purposes of this Part, in the case of a quasi-payment, the payer is “also a payee” if—
a
an entity is not a distinct and separate person from the payer for the purposes of a tax charged under the law of the United Kingdom,
b
that entity is a distinct and separate person from the payer for the purposes of a tax charged under the law of the payer jurisdiction, and
c
it would be reasonable to expect an amount of ordinary income to arise to that entity as mentioned in subsection (2)(b).
8
In this section “payer jurisdiction” means the jurisdiction under the law of which the relevant deduction may (disregarding this Part and any equivalent provision under the law of a territory outside the United Kingdom) be deducted.
9
In this Part “payee jurisdiction”, in relation to a payee, means a territory in which—
a
the payee is resident for tax purposes under the law of that territory, or
b
the payee has a permanent establishment.
Ordinary income
259BCThe basic rules
1
This section has effect for the purposes of this Part.
2
“Ordinary income” means income that is brought into account, before any deductions, for the purposes of calculating the income or profits on which a relevant tax is charged (“taxable profits”).
3
But an amount of income is not brought into account for those purposes to the extent that F7—
a
it is charged to the relevant tax at a nil rate, or
b
it is excluded, reduced or offset by any exemption, exclusion, relief, or credit—
i
that applies specifically to all or part of the amount of income (as opposed to ordinary income generally), or
ii
that arises as a result of, or otherwise in connection with, a payment or quasi-payment that gives rise to the amount of income.
4
If all the relevant tax charged on taxable profits is, or falls to be, refunded, none of the income brought into account in calculating those taxable profits is “ordinary income”.
5
If a proportion of the relevant tax charged on taxable profits is, or falls to be, refunded, the amount of any income brought into account in calculating those taxable profits that is “ordinary income” is proportionally reduced.
6
For the purposes of subsections (4) and (5) an amount of relevant tax is refunded if and to the extent that—
a
any repayment of relevant tax, or any payment in respect of a credit for relevant tax, is made to any person, and
b
that repayment or payment is directly or indirectly in respect of the whole or part of the amount of relevant tax,
but an amount refunded is to be ignored if and to the extent that it results from qualifying loss relief.
7
In subsection (6) “qualifying loss relief” means—
a
any means by which a loss might be used for corporation tax or income tax purposes to reduce the amount in respect of which a person is liable to tax, or
b
any corresponding means by which a loss corresponding to a relevant tax loss might be used for the purposes of a relevant tax other than corporation tax or income tax to reduce the amount in respect of which a person is liable to tax,
(and in paragraph (b) “relevant tax loss” means a loss that might be used as mentioned in paragraph (a)).
8
References to an amount of ordinary income being “included in” taxable profits are to that amount being brought into account for the purposes of calculating those profits.
F98A
Income is to be treated as “ordinary income” if it would fall to be brought into account for the purpose of calculating taxable profits of a person but for the fact that the person is a qualifying institutional investor (and, if the person is based in a territory under the law of which there is no relevant tax on income of the kind in question, if the territory had such a tax).
For the meaning of “qualifying institutional investor” see section 259NDA.
9
In this section “relevant tax” means a tax other than the CFC charge or a foreign CFC charge.
10
Section 259BD contains provision for ordinary income to arise to chargeable companies by virtue of the CFC charge or a foreign CFC charge.
259BDChargeable companies in respect of CFCs and foreign CFCs
1
This section has effect for the purposes of this Part.
2
Subsections (3) to (7) apply where an amount of income arises to an entity (“C”) that is a CFC, a foreign CFC or both and all or part of that amount (the “relevant income”)—
a
is not ordinary income of C under section 259BC, or
b
arises as a result of a payment or quasi-payment under, or in connection with, a financial instrument or hybrid transfer arrangement and—
i
is (disregarding subsection (4)) ordinary income of C under section 259BC for a taxable period, but
ii
under taxed.
3
The following steps determine whether, and to what extent, the relevant income is “ordinary income” of a chargeable company in relation to the CFC charge or a foreign CFC charge.
Step 1 Determine—
- a
whether any of the relevant income is brought into account in calculating C's chargeable profits for the purposes of the CFC charge or a foreign CFC charge, and
- b
if so, the amount of the relevant income that is so brought into account for the purposes of each relevant charge.
If none of the relevant income is so brought into account, then none of it is “ordinary income” of a chargeable company and no further steps are to be taken.
See subsections (10) to (12) for further provision about how this step is to be taken.
For the purposes of this section—
“relevant chargeable profits” are chargeable profits in relation to the calculation of which, for the purposes of the CFC charge or a foreign CFC charge, any of the relevant income is brought into account;
“relevant charge” means a charge in relation to which any of the relevant income is brought into account in calculating chargeable profits.
- a
Step 2 In relation to each relevant charge, determine the proportion of C's relevant chargeable profits, for the purposes of that charge, that is apportioned to each chargeable company.
For the purposes of this section, each chargeable company to which 25% or more of C's relevant chargeable profits for the purposes of a relevant charge are apportioned is a “relevant chargeable company”.
If there are no relevant chargeable companies in relation to any relevant charges, then none of the relevant income is “ordinary income” of a chargeable company and no further steps are to be taken.
Step 3 In relation to each relevant chargeable company, determine what is the appropriate proportion of the relevant income brought into account in calculating relevant chargeable profits, for the purposes of the relevant charge concerned.
That proportion of that income is “ordinary income” of that company for the taxable period for which that charge is charged on it by reference to those profits.
For the purposes of this step, the “appropriate proportion”, in relation to a relevant chargeable company, is the same as the proportion of the relevant chargeable profits that is apportioned to it for the purposes of the relevant charge.
4
An amount of relevant income that is ordinary income of a relevant chargeable company in accordance with subsection (3) is not ordinary income of C (so far as it otherwise would be).
5
Relevant chargeable profits apportioned to a relevant chargeable company for the purposes of a relevant charge are “taxable profits” of that company for the taxable period for which the charge is charged on it by reference to those profits.
6
The amount of the relevant income that is ordinary income of that relevant chargeable company under subsection (3), by virtue of being brought into account in calculating those relevant chargeable profits, is “included in” those taxable profits.
7
References to tax charged on taxable profits include a relevant charge charged by reference to relevant chargeable profits that are taxable profits under subsection (5).
8
For the purposes of subsection (2)(b), an amount of ordinary income is “under taxed” if the highest rate at which tax is charged, for C's taxable period, on the taxable profits in which the amount is included, taking into account on a just and reasonable basis any credit for underlying tax, is less than C's full marginal rate for that period.
9
In subsection (8)—
a
C's “full marginal rate” means the highest rate at which the tax that is chargeable on those taxable profits could be charged on taxable profits, of C for the taxable period, which include ordinary income that arises from, or in connection with, a financial instrument, and
b
“credit for underlying tax” means a credit or relief given to reflect tax charged on profits that are wholly or partly used to fund (directly or indirectly) the payment or quasi-payment mentioned in subsection (2)(b).
10
For the purposes of step 1 in subsection (3), section 259BC(3) applies for the purposes of determining the extent to which an amount of relevant income is brought into account in calculating chargeable profits as it applies for the purposes of determining the extent to which an amount of income is brought into account for the purposes of calculating taxable profits.
11
Subsection (12) applies for the purposes of step 1 in subsection (3), if—
a
the amount of income arising to C mentioned in subsection (2)—
i
is not all relevant income, and
ii
is only partly brought into account in calculating chargeable profits for the purposes of the CFC charge or a foreign CFC charge, and
b
accordingly, it falls to be determined whether, and to what extent, the relevant income is brought into account in calculating those profits for the purposes of the charge concerned.
12
The relevant income is to be taken to be brought into account (if at all) only to the extent that the total amount of income mentioned in subsection (2) that is brought into account exceeds the amount of income mentioned in that subsection that is not relevant income.
F312A
For the purposes of subsection (2)—
a
a qualifying CFC amount arising to C is treated as an amount of relevant income,
b
a qualifying CFC amount arising to C, for a permitted taxable period, is “under taxed” if the highest rate at which tax is charged on the amount, taking into account on a just and reasonable basis the effect of any credit for underlying tax, is less than C’s full marginal rate for that period,
c
in determining C’s “full marginal rate”, the reference to the taxable profits mentioned in subsection (9) includes any qualifying CFC amount, and
d
in determining a “credit for underlying tax”, the reference to profits includes any qualifying CFC amount.
12B
For the purposes of subsection (12A) a “qualifying CFC amount” means an amount arising to C which is brought into account in calculating chargeable profits for the purposes of a foreign CFC charge.
12C
But an amount is not regarded for this purpose as brought into account so far as—
a
the amount is excluded, reduced or offset for the purposes of the foreign CFC charge by any exemption, exclusion, relief or credit that—
i
applies specifically to all or part of the amount (as opposed to amounts brought into account for those purposes generally), or
ii
arises as a result of, or otherwise in connection with, a payment or quasi-payment that gives rise to the amount, or
b
the sum charged for the purposes of the foreign CFC charge is, or falls to be, refunded (and section 259BC(6) and (7) apply for the purposes of this paragraph with the necessary modifications).
13
In this section—
“chargeable company”—
- a
in relation to the CFC charge, has the same meaning as in Part 9A (see section 371VA), and
- b
in relation to a foreign CFC charge, means an entity (by whatever name known) corresponding to a chargeable company within the meaning of that Part;
- a
“chargeable profits”—
- a
in relation to the CFC charge, has the same meaning as in that Part (see that section), and
- b
in relation to a foreign CFC charge, means the concept (by whatever name known) corresponding to chargeable profits within the meaning of that Part F4(including any qualifying CFC amount within the meaning given by subsection (12B));
- a
“hybrid transfer arrangement” has the meaning given by section 259DB.
Hybrid entity etc
259BEMeaning of “hybrid entity”, “investor” and “investor jurisdiction”
1
For the purposes of this Part, an entity is “hybrid” if it meets conditions A and B.
2
Condition A is that the entity is regarded as being a person for tax purposes under the law of any territory.
3
Condition B is that—
a
some or all of the entity's income or profits are treated (or would be if there were any) for the purposes of a tax charged under the law of any territory, as the income or profits of a person or persons other than the person mentioned in subsection (2), or
b
under the law of a territory other than the one mentioned in subsection (2), the entity is not regarded as a distinct and separate person to an entity or entities that are distinct and separate persons under the law of the territory mentioned in that subsection.
4
For the purposes of this Part—
a
where subsection (3)(a) applies, a person who is treated as having the income or profits of the hybrid entity is an “investor” in it,
b
where subsection (3)(b) applies, an entity that—
i
is regarded as a distinct and separate person to the hybrid entity under the law of the territory mentioned in subsection (2), but
ii
is not regarded as a distinct and separate person to the hybrid entity under the law of another territory,
is an “investor” in the hybrid entity, and
c
any territory under the law of which an investor is within the charge to a tax is an “investor jurisdiction” in relation to that investor.
Permanent establishments
259BFMeaning of “permanent establishment”
1
In this Part “permanent establishment” means anything that is—
a
a permanent establishment of a company within the meaning of the Corporation Tax Acts (see section 1119 of CTA 2010), or
b
within any similar concept under the law of a territory outside the United Kingdom.
2
A concept is not outside the scope of subsection (1)(b) by reason only that it is not based on Article 5 of a Model Tax Convention on Income and Capital published by the Organisation for Economic Cooperation and Development.
Pt. 6A inserted (with effect in accordance with Sch. 10 paras. 18-21 of the amending Act) by Finance Act 2016 (c. 24), Sch. 10 para. 1