In the 9 April edition of this journal (‘Finance Bill 2021: hybrid mismatch rules version 2.0’, Tax Journal, 9 April 2021), we covered a number of changes the government intends to make through the Finance (No.2) Bill 2021 to the hybrid-mismatch rules (‘the rules’), which are found within TIOPA 2010 Part 6A.
One of the changes we discussed was in relation to the definition of ‘hybrid entity’ found at s 259BE. The Finance Bill, as originally introduced to Parliament, intended to refocus this definition so that the UK’s view on the classification of an entity is only relevant where it is established or resident in the UK, or an investor in the entity is established or resident in the UK. It was intended that these changes would be treated as applying from the inception of the rules on 1 January 2017.
One of the primary beneficiaries of this change would be US LLCs. As the rules are currently drafted, US LLCs are often treated as hybrid entities because the UK generally regards such entities as fiscally opaque (subject to the precise terms of their constitutional documents), whilst they are treated as fiscally transparent for US tax purposes (absent an election to treat them as fiscally opaque).
This can have unfortunate consequences under Chapter 7 of the rules (hybrid payee deduction/non-inclusion mismatch): a payment from a UK resident entity to a US LLC can trigger a counteraction, even where that payment is fully taxed in the hands of its US parent(s). This is because, under Chapter 7, only entities which the UK regards as a partnership are able to count taxation at the level of its owners in determining whether an amount of income has been subject to an inclusion.
The government accepts this is not a proportionate application of the rules and announced in November that it would pass legislation to specifically deal with the treatment of US LLCs.
When the chancellor revealed his Budget on 3 March, the US LLC issue was conspicuously missing from the literature that detailed planned changes to the rules. However, when the Finance Bill was published eight days later, it transpired that the government had instead opted to deal with the point through changes to the hybrid entity definition at s 259BE, which we set out above. This would potentially affect a broader range of fact patterns than just US LLCs.
It now appears that these changes have effects that were not intended and so, on 15 April, the government tabled an amendment to the Finance Bill that included a provision to remove the proposed changes to s 259BE.
The government has committed to a revised provision ‘dealing with the underlying issue’ (which we take to mean the US LLC point) in the next Finance Bill, with the same effective date, i.e. from the inception of the rules on 1 January 2017.
Therefore, whilst the US LLC problem should be resolved eventually, it may be another year before the rectifying legislation is in place, leaving taxpayers in the lurch in the meantime.
In the 9 April edition of this journal (‘Finance Bill 2021: hybrid mismatch rules version 2.0’, Tax Journal, 9 April 2021), we covered a number of changes the government intends to make through the Finance (No.2) Bill 2021 to the hybrid-mismatch rules (‘the rules’), which are found within TIOPA 2010 Part 6A.
One of the changes we discussed was in relation to the definition of ‘hybrid entity’ found at s 259BE. The Finance Bill, as originally introduced to Parliament, intended to refocus this definition so that the UK’s view on the classification of an entity is only relevant where it is established or resident in the UK, or an investor in the entity is established or resident in the UK. It was intended that these changes would be treated as applying from the inception of the rules on 1 January 2017.
One of the primary beneficiaries of this change would be US LLCs. As the rules are currently drafted, US LLCs are often treated as hybrid entities because the UK generally regards such entities as fiscally opaque (subject to the precise terms of their constitutional documents), whilst they are treated as fiscally transparent for US tax purposes (absent an election to treat them as fiscally opaque).
This can have unfortunate consequences under Chapter 7 of the rules (hybrid payee deduction/non-inclusion mismatch): a payment from a UK resident entity to a US LLC can trigger a counteraction, even where that payment is fully taxed in the hands of its US parent(s). This is because, under Chapter 7, only entities which the UK regards as a partnership are able to count taxation at the level of its owners in determining whether an amount of income has been subject to an inclusion.
The government accepts this is not a proportionate application of the rules and announced in November that it would pass legislation to specifically deal with the treatment of US LLCs.
When the chancellor revealed his Budget on 3 March, the US LLC issue was conspicuously missing from the literature that detailed planned changes to the rules. However, when the Finance Bill was published eight days later, it transpired that the government had instead opted to deal with the point through changes to the hybrid entity definition at s 259BE, which we set out above. This would potentially affect a broader range of fact patterns than just US LLCs.
It now appears that these changes have effects that were not intended and so, on 15 April, the government tabled an amendment to the Finance Bill that included a provision to remove the proposed changes to s 259BE.
The government has committed to a revised provision ‘dealing with the underlying issue’ (which we take to mean the US LLC point) in the next Finance Bill, with the same effective date, i.e. from the inception of the rules on 1 January 2017.
Therefore, whilst the US LLC problem should be resolved eventually, it may be another year before the rectifying legislation is in place, leaving taxpayers in the lurch in the meantime.
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