INTM555095 - Hybrids: hybrid payee (Chapter 7): extent of the mismatch – hybrid payee is a partnership or relevant transparent entity

Where the payee is a partnership or a relevant transparent entity, when considering the ‘relevant amount’ in s259GB(4) it is to be assumed that no ordinary income arises to the payee if a partner or member is entitled to the amount, and the payee would not be regarded as a hybrid entity when considering only the laws of the jurisdictions where

  • the partnership or entity is established, and
  • the partner or member is resident for tax purposes

An entity is a relevant transparent entity if

  • it is not a partnership
  • it is legally constituted outside the UK
  • all of its income or profits would be treated as the income or profits of its members for tax purposes under the law of the territory in which it is constituted, and
  • any tax that is, or would be charged on a member resident in the territory where the entity is legally constituted is not charged at a nil rate

Examples would include many US Limited Liability Companies (LLCs) and S Corporations which have not been ‘checked closed’ for US tax purposes.

The reference to profits of the entity being treated as profits of its members should be read in the generic sense. In other words, if the overseas tax system does not treat the entity as a person for tax purposes, instead looking to tax its members, it is not necessary that its members actually be taxed in the relevant jurisdiction. The test can therefore be satisfied if the entity has members resident in jurisdictions other than its own, or if it has members which its own jurisdiction also sees as transparent.

A member of a relevant transparent entity is a person who is entitled to a share of the income or profits of the entity as a result of holding shares in the entity, or if the entity does not have share capital, they have an entitlement to the entities income or profits that is similar to that enjoyed by holding shares.

The reference to members’ profits not being taxed at a nil rate should be read generically. The test can therefore still be satisfied if the actual members have specific characteristics which cause them to be untaxed (for instance, that they are also transparent, or they are tax-exempts).

Sections 259GB(4AA) and (4AB) ensure the underlying rules work as intended in relation to cases where a hybrid entity is established in a zero-tax jurisdiction or where the structure including the hybrid payee involves more than one tier of hybrid entities.

259GB(4AA) identifies cases where

  • a partnership or relevant transparent entity is a payee in relation to a payment or quasi-payment, and
  • an amount of ordinary income arises, or potentially arises, in another hybrid entity that is not itself a payee (such as a partner in the partnership or a member of the entity) as a result of the circumstances giving rise to the relevant deduction

This is intended to identify every hybrid entity which is part of the payee or payees’ structure and whose status is in any way relevant to the existence of a mismatch.

259GB(4AB) applies to those entities identified by 4AA

  • a) If any such entity is not a partnership or a relevant transparent entity, s259GB(4A) is disapplied. S259GB(4A) will therefore not apply to cases where the hybrid entity identified in s259GB(4AA) is established in a zero tax jurisdiction
  • b) Such entities that are a partnership or relevant transparent entity are treated as a payee for the purposes of s259GB(1)(b) (and for that purpose only), to determine the extent to which any excess can be attributed to the hybridity of the entity

Section 259GB(4AB)(b) ensures that the hybridity of hybrid entities beyond the initial payee, such as the parent relevant transparent entity in this example, will be relevant in determining whether all or part of any excess arose by reason of a payee being a hybrid entity.

Commencement

For s259GB(4) the treatment for partnerships was introduced in Finance Act 2018 and for relevant transparent entities in Finance Act 2022, with both having retrospective effect.

S259GB(4AA) and (4AB) were introduced in Finance Act 2022 and are retrospective for cases where the payee is a relevant transparent entity and apply prospectively from 24 February 2022 in cases where the payee is a partnership.