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Decoding Hybrid Tax Mismatches

Writer's picture: Angelo ChirulliAngelo Chirulli

Family offices

Are you concerned about the complexities of cross-border taxation? As the global tax environment becomes more intricate, hybrid tax mismatches have emerged as a significant area of focus. These mismatches can lead to favourable tax treatments for multinational corporations, but they’ve also prompted stringent regulations to ensure fair practices.


What Are Hybrid Tax Mismatches?

Hybrid tax mismatches occur when differences in tax treatment between jurisdictions result in favourable tax outcomes. These include:

  1. Double Deductions: The same expense is deducted in two jurisdictions.

  2. Deduction/Non-Inclusion (D/NI): A payment is deductible in one country but not taxed as income in another.

  3. Double Non-Inclusion: Income goes untaxed in both jurisdictions.


Hybrid mismatches often arise from the use of hybrid instruments, hybrid entities, or differences in how jurisdictions treat financial arrangements. While these mismatches can reduce overall tax liabilities, they have also drawn the attention of regulators worldwide.


The UK’s Response

To combat hybrid tax mismatches, the UK introduced specific rules under the Taxation (International and Other Provisions) Act 2010, aligning with the OECD’s Base Erosion and Profit Shifting (BEPS) recommendations. These rules target:

  • Hybrid Instruments: Such as convertible bonds treated as debt in one jurisdiction but as equity in another.

  • Hybrid Entities: Partnerships or other structures viewed differently by participating countries.

  • Permanent Establishments (PEs): Cases where payments to PEs are not fully taxed.

The UK’s approach neutralizes tax advantages by disallowing deductions or requiring income inclusion in specific scenarios, promoting fairness and reducing aggressive tax planning.


LEXeFISCAL: Your Tax Partner

At LEXeFISCAL, we help businesses navigate the complexities of hybrid mismatch rules. From risk assessments to compliance strategies, we’re here to ensure your cross-border tax obligations are met seamlessly.


Contact us today:

Tel: +44 (0)208 092 2111

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