Finance (No. 2) Bill (HC Bill 155)

(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
5steps 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
  10to 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
  15chargeable profits.

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.

20For 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
25income” 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
30account 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.

35For 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
40chargeable 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
45charged 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) 5References 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
10taxable 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) 15C’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) 20“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
25for 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) 30Subsection (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) 35is 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
40calculating 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
45income mentioned in that subsection that is not relevant income.

(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

  Finance (No. 2) BillPage 342

  (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;

• “chargeable profits”—

  (a)

  5in 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;

• 10“hybrid transfer arrangement” has the meaning given by
  section 259DB.

Hybrid entity etc

259BE Meaning of “hybrid entity”, “investor” and “investor jurisdiction”

(1) For the purposes of this Part, an entity is “hybrid” if it meets
15conditions 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
20would 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
25subsection (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) 30where 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
35hybrid 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) 40any 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

259BF Meaning of “permanent establishment”

(1) 45In 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) 5A 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.

CHAPTER 3 Hybrid and other mismatches from financial instruments

10Introduction

259C Overview of Chapter

(1) This Chapter contains provision that counteracts hybrid or otherwise
impermissible deduction/non-inclusion mismatches that it is
reasonable to suppose would otherwise arise from payments or
15quasi-payments under, or in connection with, financial instruments.

(2) The Chapter counteracts mismatches where the payer or a payee is
within the charge to corporation tax and does so by altering the
corporation tax treatment of the payer or a payee.

(3) Section 259CA contains the conditions that must be met for this
20Chapter to apply.

(4) Section 259CB defines “hybrid or otherwise impermissible
deduction/non-inclusion mismatch” and provides how the amount
of the mismatch is to be calculated.

(5) Section 259CC contains provision that counteracts the mismatch
25where the payer is within the charge to corporation tax for the
payment period.

(6) Section 259CD contains provision that counteracts the mismatch
where a payee is within the charge to corporation tax and neither
section 259CC nor any equivalent provision under the law of a
30territory outside the United Kingdom fully counteracts the
mismatch.

(7) See also—

(a) section 259BB for the meaning of “payment”, “quasi-
payment”, “payment period”, “relevant deduction”, “payer”
35and “payee”, and

(b) section 259N for the meaning of “financial instrument”.

Application of Chapter

259CA Circumstances in which the Chapter applies

(1) This Chapter applies if conditions A to D are met.

(2) Condition A is that a payment or quasi-payment is made under, or
in connection with, a financial instrument.

(3) Condition B is that—

(a) the payer is within the charge to corporation tax for the
5payment period, or

(b) a payee is within the charge to corporation tax for an
accounting period some or all of which falls within the
payment period.

(4) Condition C is that it is reasonable to suppose that, disregarding the
10provisions mentioned in subsection (5), there would be a hybrid or
otherwise impermissible deduction/non-inclusion mismatch in
relation to the payment or quasi-payment (see section 259CB).

(5) The provisions are—

(a) this Chapter and Chapters 5 to 10, and

(b) 15any equivalent provision under the law of a territory outside
the United Kingdom.

(6) Condition D is that—

(a) it is a quasi-payment that is made as mentioned in subsection
(2) and the payer is also a payee (see section 259BB(7)),

(b) 20the payer and a payee are related (see section 259NB) at any
time in the period—

(i) beginning with the day on which any arrangement is
made by the payer or a payee in connection with the
financial instrument, and

(ii) 25ending with the last day of the payment period, or

(c) the financial instrument, or any arrangement connected with
it, is a structured arrangement.

(7) The financial instrument, or an arrangement connected with it, is a
“structured arrangement” if it is reasonable to suppose that—

(a) 30the financial instrument, or arrangement, is designed to
secure a hybrid or otherwise impermissible deduction/non-
inclusion mismatch, or

(b) the terms of the financial instrument or arrangement share
the economic benefit of the mismatch between the parties to
35the instrument or arrangement or otherwise reflect the fact
that the mismatch is expected to arise.

(8) The financial instrument or arrangement may be designed to secure
a hybrid or otherwise impermissible deduction/non-inclusion
mismatch despite also being designed to secure any commercial or
40other objective.

(9) Sections 259CC (cases where the payer is within the charge to
corporation tax for the payment period) and 259CD (cases where a
payee is within the charge to corporation tax) contain provision for
the counteraction of the hybrid or otherwise impermissible
45deduction/non-inclusion mismatch.

259CB Hybrid or otherwise impermissible deduction/non-inclusion
mismatches and their extent

(1) There is a “hybrid or otherwise impermissible deduction/non-
inclusion mismatch”, in relation to a payment or quasi-payment, if
5either or both of case 1 or 2 applies.

(2) Case 1 applies where—

(a) the relevant deduction exceeds the sum of the amounts of
ordinary income that, by reason of the payment or quasi-
payment, arise to each payee for a permitted taxable period,
10and

(b) all or part of that excess arises by reason of the terms, or any
other feature, of the financial instrument.

(3) For the purposes of subsection (2)(b)—

(a) it does not matter whether the excess or part arises for
15another reason as well (even if it would have arisen for that
other reason regardless of the terms, or any other feature, of
the financial instrument), and

(b) an excess or part of an excess is to be taken to arise by reason
of the terms, or any other feature, of the financial instrument
20(so far as would not otherwise be the case) if, on making such
of the relevant assumptions in relation to each payee as apply
in relation to that payee (see subsection (4)), it could arise by
reason of the terms, or any other feature, of the financial
instrument.

(4) 25These are the “relevant assumptions”—

(a) where a payee is not within the charge to a tax under the law
of a payee jurisdiction because the payee benefits from an
exclusion, immunity, exemption or relief (however
described) under that law, assume that the exclusion,
30immunity, exemption or relief does not apply;

(b) where an amount of income is not included in the ordinary
income of a payee for the purposes of a tax charged under the
law of a payee jurisdiction because the payment or quasi-
payment is not made in connection with a business carried on
35by the payee in that jurisdiction, assume that the payment or
quasi-payment is made in connection with such a business;

(c) where a payee is not within the charge to a tax under the law
of any territory because there is no territory where the payee
is—

(i) 40resident for the purposes of a tax charged under the
law of that territory, or

(ii) within the charge to a tax under the law of that
territory as a result of having a permanent
establishment in that territory,

45assume that the payee is a company that is resident for tax
purposes, and carries on a business in connection with which
the payment or quasi-payment is made, in the United
Kingdom.

(5) Case 2 applies where there are one or more amounts of ordinary
50income (“under-taxed amounts”) that—

(a) arise, by reason of the payment or quasi-payment, to a payee
for a permitted taxable period, and

(b) are under taxed by reason of the terms, or any other feature,
of the financial instrument.

(6) 5For the purposes of subsection (5)(b) it does not matter whether an
amount of ordinary income is under taxed for another reason as well
(even if it would have been under taxed for that other reason
regardless of the terms, or any other feature, of the financial
instrument).

(7) 10A taxable period of a payee is “permitted” in relation to an amount
of ordinary income that arises as a result of the payment or quasi-
payment if—

(a) the period begins before the end of 12 months after the end of
the payment period, or

(b) 15where the period begins after that—

(i) a claim has been made for the period to be a permitted
period in relation to the amount of ordinary income,
and

(ii) it is just and reasonable for the amount of ordinary
20income to arise for that taxable period rather than an
earlier period.

(8) An amount of ordinary income of a payee, for a permitted taxable
period, is “under taxed” if the highest rate at which tax is charged on
the taxable profits of the payee in which the amount is included,
25taking into account on a just and reasonable basis the effect of any
credit for underlying tax, is less than the payee’s full marginal rate
for that period.

(9) The payee’s “full marginal rate” means the highest rate at which the
tax that is chargeable on the taxable profits mentioned in subsection
30(8) could be charged on taxable profits, of the payee for the permitted
taxable period, which include ordinary income that arises from, or in
connection with, a financial instrument.

(10) A “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
35or indirectly) the payment or quasi-payment.

(11) Where case 1 applies, the amount of the hybrid or otherwise
impermissible deduction/non-inclusion mismatch is equal to the
excess that arises as mentioned in subsection (2)(b).

(12) Where case 2 applies, the amount of the hybrid or otherwise
40impermissible deduction/non-inclusion mismatch is equal to the
sum of the amounts given in respect of each under-taxed amount
by—

(13) 5Where cases 1 and 2 both apply, the amount of the hybrid or
otherwise impermissible deduction/non-inclusion mismatch is the
sum of the amounts given by subsections (11) and (12).

Counteraction

259CC Counteraction where the payer is within the charge to corporation tax
10for the payment period

(1) This section applies where the payer is within the charge to
corporation tax for the payment period.

(2) For corporation tax purposes, the relevant deduction that may be
deducted from the payer’s income for the payment period is reduced
15by an amount equal to the hybrid or otherwise impermissible
deduction/non-inclusion mismatch mentioned in section 259CA(4).

259CD Counteraction where a payee is within the charge to corporation tax

(1) This section applies in relation to a payee where—

(a) the payee is within the charge to corporation tax for an
20accounting period some or all of which falls within the
payment period, and

(b) it is reasonable to suppose that—

(i) neither section 259CC nor any equivalent provision
under the law of a territory outside the United
25Kingdom applies, or

(ii) a provision of the law of a territory outside the United
Kingdom that is equivalent to section 259CC applies,
but does not fully counteract the hybrid or otherwise
impermissible deduction/non-inclusion mismatch
30mentioned in section 259CA(4).

(2) A provision of the law of a territory outside the United Kingdom that
is equivalent to section 259CC does not fully counteract that
mismatch if (and only if)—

(a) it does not reduce the relevant deduction by the full amount
35of the mismatch, and

(b) the payer is still able to deduct some of the relevant
deduction from income in calculating taxable profits.

(3) In this section “the relevant amount” is—

(a) in a case where subsection (1)(b)(i) applies, an amount equal
40to the hybrid or otherwise impermissible deduction/non-
inclusion mismatch mentioned in section 259CA(4), or

(b) in a case where subsection (1)(b)(ii) applies, the lesser of—

(i) the amount by which that mismatch exceeds the
amount by which it is reasonable to suppose the
45relevant deduction is reduced by a provision under
the law of a territory outside the United Kingdom that
is equivalent to section 259CC, and

(ii) the amount of the relevant deduction that may still be
deducted as mentioned in subsection (2)(b).

(4) If the payee is the only payee, the relevant amount is to be treated as
income arising to the payee for the counteraction period.

(5) 5If there is more than one payee, an amount equal to the payee’s share
of the relevant amount is to be treated as income arising to the payee
for the counteraction period.

(6) The payee’s share of the relevant amount is to be determined by
apportioning that amount between all the payees on a just and
10reasonable basis, having regard (in particular)—

(a) to any arrangements as to profit sharing that may exist
between some or all of the payees,

(b) to whom any under-taxed amounts (within the meaning
given by section 259CB(5)) arise, and

(c) 15to whom any amounts of ordinary income that it would be
reasonable to expect to arise as a result of the payment or
quasi-payment, but that do not arise, would have arisen.

(7) An amount of income that is treated as arising under subsection (4)
or (5) is chargeable under Chapter 8 of Part 10 of CTA 2009 (income
20not otherwise charged) (despite section 979(2) of that Act).

(8) The “counteraction period” means—

(a) if an accounting period of the payee coincides with the
payment period, that accounting period, or

(b) otherwise, the first accounting period of the payee that is
25wholly or partly within the payment period.

CHAPTER 4 Hybrid transfer deduction/non-inclusion mismatches

Introduction

259D Overview of Chapter

(1) This Chapter contains provision that counteracts deduction/non-
30inclusion mismatches that it is reasonable to suppose would
otherwise arise from payments or quasi-payments as a consequence
of hybrid transfer arrangements.

(2) The Chapter counteracts mismatches where the payer or a payee is
within the charge to corporation tax and does so by altering the
35corporation tax treatment of the payer or a payee.

(3) Section 259DA contains the conditions that must be met for this
Chapter to apply.

(4) Section 259DB defines “hybrid transfer arrangement”.

(5) Section 259DC defines “hybrid transfer deduction/non-inclusion
40mismatch” and provides how the amount of the mismatch is to be
calculated.

(6) Section 259DD contains provision in connection with excluding
mismatches from counteraction by the Chapter where they arise as a
consequence of the tax treatment of a financial trader.

(7) Section 259DE contains provision that counteracts the mismatch
5where the payer is within the charge to corporation tax for the
payment period.

(8) Section 259DF contains provision that counteracts the mismatch
where a payee is within the charge to corporation tax and neither
section 259DE nor any equivalent provision under the law of a
10territory outside the United Kingdom fully counteracts the
mismatch.

(9) See also section 259BB for the meaning of “payment”, “quasi-
payment”, “payment period”, “relevant deduction”, “payer” and
“payee”.

15Application of Chapter

259DA Circumstances in which the Chapter applies

(1) This Chapter applies if conditions A to E are met.

(2) Condition A is that there is a hybrid transfer arrangement in relation
to an underlying instrument (see section 259DB).

(3) 20Condition B is that a payment or quasi-payment is made under or in
connection with—

(a) the hybrid transfer arrangement, or

(b) the underlying instrument.

(4) Condition C is that—

(a) 25the payer is within the charge to corporation tax for the
payment period, or

(b) a payee is within the charge to corporation tax for an
accounting period some or all of which falls within the
payment period.

(5) 30Condition D is that it is reasonable to suppose that, disregarding this
Part and any equivalent provision under the law of a territory
outside the United Kingdom, there would be a hybrid transfer
deduction/non-inclusion mismatch in relation to the payment or
quasi-payment (see section 259DC).

(6) 35Condition E is that—

(a) it is a quasi-payment that is made as mentioned in subsection
(3) and the payer is also a payee (see section 259BB(7)),

(b) the payer and a payee are related (see section 259NB) at any
time in the period—

(i) 40beginning with the day on which the hybrid transfer
arrangement is made, and

(ii) ending with the last day of the payment period, or

(c) the hybrid transfer arrangement is a structured arrangement.

(7) The hybrid transfer arrangement is a “structured arrangement” if it
45is reasonable to suppose that—