Our series of articles looking at the practical implications of the anti-hybrid and other mismatch rules applying, broadly, to deductions on or after 1 January 2017, concludes this week with a look at how the rules may apply to the release of a loan that has a UK company borrower and a non-UK group company lender.  The key point is that the hybrid and other mismatch rules should not be relevant if the overseas lender does not obtain a deduction in respect of the release.  However, if relief is obtained, consideration should be given as to whether the UK company is required to recognise taxable income.  It follows that the overseas tax treatment of the release should be checked. Below, we take a look at an example of how the rules may be applied.

Background

• A UK company has borrowed from an overseas group company.
• The UK borrower gets into financial difficulty and the overseas lender agrees to release the debt.
• It would be expected that the amount released is not taxable, perhaps because the release credit is recognised directly in equity or the relief for releases of loans between connected companies would apply.

Could the hybrid and other mismatch rules require the UK borrower to recognise taxable income?

• There is a mismatch if the overseas lender obtains relief in relation to the loan release but the UK borrower is not taxable.
• The draft HMRC guidance issued in December 2016 includes an example which suggests that the hybrid and other mismatch rules may apply to such a mismatch.

The treatment of a release will depend on the particular circumstances. We recommend that businesses should ensure that they fully understand the tax treatment of their global transactions to establish what the impact of the new rules on them may be. If you have any questions, then please get in touch with your usual KPMG contact or one of the named contacts below.

This article is the eighth in a series on the application of the UK’s new hybrid and other mismatch rules. The previous articles in this series cover:

• An overview of the new rules;
• Their application in the context of an election to disregard a UK subsidiary for US tax purposes;
• How they can apply to deny a deduction for the purchase of goods;
• Consequences for US investors with UK ‘Check the Box’ entities;
• The impact on trading deductions in a dual resident company;
• Mismatches in chains of transactions outside the UK in relation to private equity funding; and
• Examples of payments made to hybrid entities.

Please note this article was drafted before publication of updated HMRC guidance on hybrids and other mismatches on 31 March.

For further information please contact :

Rob Norris

Mark Eaton