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Exemption of certain regulatory capital securities from hybrid mismatch rules

Exemption of certain regulatory capital securities

New regulations exempt ‘regulatory capital securities’ from being ‘financial instruments’ for the purposes of the hybrid and other mismatches rules.

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Director, Financial Services Tax

KPMG in the UK

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The Hybrid and Other Mismatches (Financial Instrument: Exclusions) Regulations 2019, SI 2019/1251 now give effect to the Government’s previous announcement, exempting ‘regulatory capital securities’ from being ‘financial instruments’ for the purposes of Chapter 3 of the Hybrid and Other Mismatches rules in Part 6A TIOPA.

Chapter 3 counters deduction/non-inclusion mismatches (D/NI mismatches) arising from payments or quasi-payments made under, or in connection with, a financial instrument.

These rules used to contain a special exemption that excluded ‘regulatory capital securities’ within the meaning of the Taxation of Regulatory Capital Regulations 2013 from being ‘financial instruments’ for this purpose. However, this was repealed with effect from 1 January 2019, when the regulations themselves were repealed (as being potentially incompatible with EU State Aid requirements).

At the time of the repeal, the Government announced that a new exemption would be put in place by regulation to take effect retrospectively from 1 January 2019 and effectively preserve the status quo.

The Hybrid and Other Mismatches (Financial Instrument: Exclusions) Regulations 2019, SI 2019/1251 now give effect to that announcement. 

The list of instruments benefitting from the new exclusion largely mirrors that benefitting from the old exemption, subject to the following differences:

  • The new exemption also brings in ‘own funds and eligible liabilities which are not excluded under art. 123(4) of the Bank Recovery and Resolution (No. 2) Order 2014’;
  • The old exemption applied to instruments which had been part of a bank’s AT1/T2 capital at some point in time even if they did so no longer. It is not immediately clear that this ‘once in, always in’ aspect of the definition has been preserved;
  • For banks, the definitions now cross refer to UK legislation rather than directly to the Capital Requirements Regulation; and
  • Shares are no longer explicitly excluded from benefitting from the exclusion.

Depending on the form that Brexit takes, it is expected that the Government might need to issue further regulations later this year to amend these new rules so that they comply with the conditions relating to the exemption of regulatory capital instruments set out in Article 9(4)(b) of the EU Anti-Tax Avoidance Directive.

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