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

Overview of Chapter 7: hybrid payee deduction/non-inclusion mismatches

Section 259G provides an overview of Chapter 7, which deals with counteracting tax mismatches that arise when a payment is made to a recipient (payee) that is a hybrid entity — that is, an entity treated differently for tax purposes in different jurisdictions, resulting in a deduction for the payer but no corresponding inclusion in the payee's taxable income.

• Chapter 7 targets situations where a payment or quasi-payment gives rise to a tax deduction for the payer, but the corresponding income is not fully taxed in the hands of the payee because the payee is a hybrid entity
• The mismatch can be counteracted by denying or restricting the payer's corporation tax deduction for the payment period, or by treating taxable income as arising to a UK corporation tax-paying investor in the hybrid entity
• Where the payee is both a hybrid entity and a limited liability partnership (LLP), income chargeable to corporation tax may be treated as arising directly to that LLP to counteract any remaining mismatch
• A secondary counteraction (taxing the investor or the LLP payee) only applies if the mismatch has not already been fully addressed by adjusting the payer's position or by equivalent rules in an overseas jurisdiction