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

Hybrid transfer deduction/non-inclusion mismatches and their extent

Section 259DC identifies two types of mismatch (Case 1 and Case 2) that can arise from hybrid transfer arrangements, and explains how to measure the extent of each mismatch.

• Case 1 applies where the payer's tax deduction exceeds the total ordinary income recognised by the payee(s), and that excess is attributable to a dual treatment condition or a substitute payment
• Case 2 applies where the payee does recognise ordinary income but that income is taxed at a rate below the payee's full marginal rate, again because of a dual treatment condition or a substitute payment
• Certain assumptions are applied when testing whether a mismatch exists — for example, disregarding any tax exemptions or reliefs the payee enjoys, and treating a payee not taxable anywhere as if it were a UK-resident company
• Both Case 1 and Case 2 mismatches are excluded where the financial trader exclusion applies or where the payee is a relevant investment fund