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Hybrid and other mismatch rules – when are they relevant?

Hybrid and other mismatch rules – when are they..

In the second of a series of articles, we look at the UK’s new hybrid rules in the context of an election to disregard a UK subsidiary for US tax purposes.


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The hybrid mismatch rules can apply to restrict a UK deduction, or impute UK taxable income, where expenditure is deductible but the corresponding income is not fully taxable or the same item of expenditure is deductible in more than one jurisdiction. For example, suppose a US parent company receives interest on a loan to its disregarded UK subsidiary. There is a mismatch if the interest expense is deductible in the UK but the corresponding interest income is not taxable because, for US tax purposes, the UK subsidiary and the loan do not exist.

We recently advised on a situation where the rules were found to apply to a loan between two UK group companies (subsidiaries of a US parent) even though there was not a mismatch in the UK or the US. This treatment arose because the legislation operates mechanically with no motive test and so the rules can apply in unexpected situations.

In this situation, there was a loan between two UK companies, both of which were disregarded for US tax purposes.

In the UK, the interest expense and income would be taxable and allowable as recognised in the accounts, so there is no mismatch in the UK tax treatment. Within the US, the structure of the wholly owned group was such that, within the consolidated tax return, both the interest expense and interest income would be separately recognised, so there would also be no mismatch in the US tax treatment.

Whilst it might not be expected that the anti-hybrid rules would apply in these circumstances, their application is triggered because the interest expense on the borrowing is deductible in both the UK and the US.

The rules are effectively turned off and there is no disallowance of the interest expense in the UK if there is income in the UK borrowing company which is taxed both in the UK and the US. However, in this case, as a practical matter, there is expected to be no such income in the borrower. In addition, whilst the interest income on the lending is taxable both in the UK and the US, this arises in the UK lender not the UK borrower, and so is not relevant to the mechanical application of the anti-hybrid rules.

Having identified the issue, it was possible to restructure the arrangements such that there is not a mismatch which is within the scope of the anti-hybrid rules, but there would have been a material downside if this issue had not been identified.

This example illustrates that the rules may not operate as expected. In order to assess whether the rules are relevant, it is necessary to fully understand the overseas tax treatment. Businesses should therefore act now to ensure that they fully understand the tax treatment of their global transactions, and to establish what the impact of the new rules on them may be. If you have any questions on the application of the hybrid mismatch rules to your business, then please get in touch with your usual KPMG contact or one of the named contacts below.


For further information please contact :

Rob Norris

Mark Eaton

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KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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