Switzerland: UK’s hybrid mismatch rules to impact Swiss entities
The UK's new legislation to tackle hybrid mismatches, which enters into force on January 1 2017, may impact certain Swiss principal structures that are benefitting from a so-called Circular No. 8 regime.
The UK rules
On September 15 2016, the UK enacted hybrid mismatch legislation as part of its Finance Act 2016, which will apply from next year. The rules as a whole are intended to implement the best practice recommendations in the OECD's final report on BEPS Action 2. The UK is one of the first countries to introduce these recommendations.
Hybrid mismatches are defined as cases where an amount is deductible in one jurisdiction, but not taxed in any other (a deduction/non-inclusion mismatch), or where an amount is deductible more than once (double deduction mismatches).
Under the UK's rules, deductions may not be permitted for payments from the UK to non-UK recipients if the arrangement gives rise to a deduction/non-inclusion mismatch, including those that arise because the UK payee is a company that has one or more permanent establishments (PEs).
Swiss principal companies benefitting from the Swiss Federal Circular No. 8 regime may fall within the UK hybrid mismatch rules. Such Swiss companies use the Swiss principal model as an effective means to optimise the structure of multinational companies on a regional basis.
Where Swiss principal companies are affected by the UK rules, the UK limited risk distributor's commissionaire's costs for goods and services provided from a UK entity to the Swiss principal may no longer be fully tax deductible in the UK from January 2017. This could give rise to potentially significant additional tax costs for the UK and Swiss entities.
However, it may be possible to retain the full UK tax deduction for goods or services. This could be done by seeking an agreement with the Swiss tax authorities that Circular No. 8 will not be applied on sales to the UK and those sales will be subject to full direct federal tax in Switzerland.
Before the UK's hybrid rules apply, there is a short timeframe now for companies to assess the impact of these rules on their structures and make any changes to remain compliant with the rules.
Where any part of the UK deduction for costs of services or goods obtained from the Swiss principal might be denied, this could give rise to potentially significant additional tax costs.
Of course, the exact position for each taxpayer and resulting impact of the UK's new rules will be dependent on their specific facts, including, for example whether other rulings have been obtained. We therefore recommend that all companies review their structures to consider whether any of the UK's hybrid rules apply.
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