A wrecking ball for tower structures: major reform of hybrid rules announced

Matthew Wentworth-May

The UK Government is keen to be seen as taking the lead in implementing the OECD’s recent recommendations to counteract perceived international tax avoidance.

No surprise there given next year’s general election, and it is hybrid structures that are first in the firing line.

In brief, hybrid structures seek to take advantages of mismatches between the tax systems in two different countries, either by obtaining a double deduction for what is in effect one payment or by obtaining a tax deduction in one country without any corresponding tax charge in another country.

The UK does have existing hybrid rules, but to date these have only been concerned with counteracting structures that seek to obtain a UK tax advantage. This has meant that structures that seek to obtain a tax deduction in a foreign jurisdiction (typically the US, through so-called “tower” structures) have fallen outside the scope of the rules.

Whilst we await the details, the consultation announced today suggests that the UK will now render such structures ineffective by making them subject to UK tax in circumstances where the relevant foreign country still allows a tax deduction to be claimed.

The writing has been on the wall for hybrid structures for some time now, and with the US separately announcing its plans to deny a tax deduction under these structures in any event, most multinationals are already putting in place plans to unwind them. This change will likely hasten their demise. 


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