How ordinary loans become surprise hybrids

The new UK anti-hybrid rules were swiftly enacted following recommendations from the OECD as part of the BEPS project. The rules were advertised as being aimed at aggressive tax planning schemes that exploit mismatches in international tax law. However, they go much further than this. An offshore arrangement by a UK company’s ‘related’ parties could catapult it into the hybrid rules – even if the company is completely unaware. This creates a challenging compliance burden on UK companies, as well as the risk that deductions are ultimately denied. The only practicable solution is for borrowers to obtain contractual protection, but this is not straightforward.