»Ê¹ÚÌåÓýapp

Condition C is set out at s259DE(6). »Ê¹ÚÌåÓýapp condition is satisfied if both of the following apply

• the return on the underlying security must not be one to which Chapter 3 of the UK hybrid and other mismatches provisions, nor an equivalent foreign provision, would apply. This counters the use of hybrid transfers as a means to avoid counteraction on the underlying instrument.
• the hybrid transfer arrangement giving rise to the substitute payment is not a structured arrangement, see INTM552150

Part 6A and Equivalent Foreign Provision

»Ê¹ÚÌåÓýapp example in looks at the situation where equivalent foreign provisions to the UK hybrid and other mismatches provisions deny the financial trader exclusion. In this case we have L Co which is resident in country L which holds shares in I Co which is resident in country I. L Co lends the stock in I Co to U Co which is resident in the UK. U Co is a financial trader and it uses the borrowed stock as part of its trade to sell these shares short. (»Ê¹ÚÌåÓýapp repurchase price is expected to be less than the sale price allowing a profit on the transaction.)

In this example U Co, L Co and I Co are related parties. Country I allows a deduction for dividends paid. However, it also has equivalent hybrid and other mismatches provisions. »Ê¹ÚÌåÓýappse provisions act to deny a deduction for dividends paid in country I if the payment is made to a related party. This means that if a dividend were paid direct from I Co to L Co then the deduction in I Co would be denied.

In the example the dividend is paid from I Co to U Co followed by a substitute payment to L Co. Here the deduction from I Co is allowed. However, because the direct payment of the underlying return from I Co to L Co would trigger the equivalent foreign hybrids and mismatches provisions in Country I then under condition C the financial trader exclusion is not allowed. As shown in this example this satisfies the conditions for there to be a hybrid transfer deduction/non-inclusion mismatch and a counteraction is required.

Structured arrangements

»Ê¹ÚÌåÓýapp example in shows condition C is failed because the hybrid transfer arrangement giving rise to the substitute payment is a structured arrangement. This is because the transaction was structured giving rise to taxable benefits both to L Co and U Co and both the deductibility of the substitute payment paid by U Co and the non-taxation of the receipt of the substitute payment to L Co are critical to the design of the arrangement.