Taxation (International and Other Provisions) Act 2010 section 259CB

Hybrid or otherwise impermissible deduction/non-inclusion mismatches and their extent

Section 259CB defines when a "hybrid or otherwise impermissible deduction/non-inclusion mismatch" arises in relation to a payment or quasi-payment involving a financial instrument, and how the extent of any such mismatch is calculated.

• A mismatch arises under Case 1 where the payer's deduction exceeds the total ordinary income recognised by all payees, and that excess is attributable to the terms or features of the financial instrument
• A mismatch arises under Case 2 where income is recognised by a payee but is "under-taxed" because of the terms or features of the financial instrument, with the mismatch amount calculated using a formula based on the shortfall between the payee's full marginal tax rate and the actual rate applied
• When testing whether a mismatch exists, certain "relevant assumptions" are applied — for example, stripping away any tax exemptions the payee enjoys, assuming payments relate to a business in the payee's jurisdiction, and if the payee is not taxable anywhere, assuming it is a UK-resident company
• Excesses arising from debt relief provisions, interest distribution designations, or the payee being a relevant investment fund are excluded from the mismatch calculation