Corporation Tax Act 2009 section 592

Embedded derivatives treated as meeting condition in section 591 etc

Section 592 deals with how certain embedded derivatives within hybrid instruments are treated when their underlying subject matter consists entirely of shares or unit trust rights, ensuring they are excluded from the derivative contracts regime and instead taxed as chargeable assets, while the host contract is treated as a loan relationship.

• Where a hybrid derivative contains an embedded derivative whose underlying subject matter is wholly shares or unit trust rights, the embedded derivative is treated as meeting the exclusion conditions and becomes a chargeable asset rather than a derivative contract
• The host contract (the non-derivative element of the hybrid instrument) is treated as a creditor relationship of the company, bringing it within the loan relationships rules in Parts 5 and 6 of the Act
• The section only applies where the hybrid derivative itself is classified as a financial asset or liability (rather than as a derivative) for accounting purposes, and the embedded element is treated by accounting standards as a derivative
• When testing whether the underlying subject matter consists wholly of shares or unit trust rights, minor or subordinate amounts of other subject matter may be disregarded under the rules in section 590