UK anti-hybrid legislation: impact on Swiss structures

in Tax, 20.10.2016

The UK’s new anti-hybrid rules will impact “hybrid arrangements” from 1 January 2017 in response to Action 2 of the OECD Base Erosion and Profit Shifting (BEPS) project. The rules have been broadly worded and arguably go further than the OECD’s recommendations in the Final Report on Action 2. Many multinational groups will be affected. The impact on the UK tax profile will often depend on the nature of arrangements and transactions outside the UK.


In short, the new rules will apply to “hybrid mismatches” that involve a payment that gives rise to a deduction but no-inclusion of income outcome or a payment that gives rise to a double deduction, including the following situations:

  • Hybrid instruments: mismatches that result from the different treatment of terms or features of a financial instrument (for example, if the instrument is treated as debt in one territory and equity in another);
  • Hybrid entities: mismatches that result from the hybrid nature of entities (those that are treated as taxable persons under one territory’s tax law, but as tax-transparent entities under another’s);
  • Hybrid transfer arrangements: mismatches that result from the differing ways that parties to arrangements such as stock loans and repos treat them for tax purposes;
  • Companies with permanent establishments (PEs) outside their state of residence: mismatches that arise from PEs, either because payments to companies with a PE are not fully taxed in either the head office or PE territory, or because the PE territory permits tax deductions for actual or notional payments to the head-office territory that are not correspondingly taxed there;
  • Dual resident companies: mismatches that lead to double deductions for the same expense. Such mismatches may occur if a company is resident in two territories or has a PE outside its territory of residence.

The specific counteraction varies in each specific case. In general, the rules provide for:

  • the UK to impose additional taxable income when a UK corporate taxpayer receives a payment that would otherwise give rise to a mismatch; or
  • the UK to deny tax deductions or limit them when a UK corporate taxpayer makes such a payment.

Impact to Swiss structures

Multinationals with a Swiss structure that involves one of the feature listed above might be affected by these new rules. Where this is the case, the rules could impact payments by a UK company to a Swiss company, in particular in the following situations:

  • Swiss company benefiting from the Principal regime under Circular 8 issued by the Federal Tax Authorities. A payment by a UK group company might no longer be fully tax deductible in the UK where the principal benefits from a principal company regime under Circular 8 of the Federal Tax Authorities;
  • Swiss company, that receives payments from a UK group company, that benefits from an international allocation to a foreign permanent establishment under the unilateral foreign branch exemption;
  • Swiss company financed by hybrid financing instrument (leading to a tax-deductible interest expense in Switzerland and tax-exempt dividend income in the receiving jurisdiction) which then on-lends to a UK group company;
  • Swiss finance branch structure used to finance a UK group company.

In the event taxpayers are impacted by the new rules, it may be possible to restructure the arrangements to mitigate the impact of the rules, in particular by eliminating the hybrid impact on the payment from a UK company. Negotiations with the Swiss tax authorities might be needed in certain of these scenarios.

Summary and recommendation

The UK’s new anti-hybrid rules will be effective from January, 2017. There is a short time frame for companies to assess the impact of these rules and make any changes to remain compliant with the rules and avoid a significant increase of the tax rate and/or even worse a double taxation of income.

The resulting impact of the UK’s new rules will obviously be dependent on the group’s specific facts. We therefore strongly recommend that all companies that are potentially affected immediately perform an impact assessment to get clarity as to whether any of the UK’s hybrid rules may impact them and explore options to mitigate adverse implications.



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