Background
Hybrid legislation came into effect as of 1 January 2017, and was drafted closely in line with the recommendations of the BEPS Action 2 report. While the UK considered its rules consistent with the ATAD and ATAD 2[1] for the most part (which is unsurprising given these too were aligned with the Action 2 report principles), the UK government has now proposed some changes with the aim of ensuring its legislation fully conforms with the Directive requirements. Notwithstanding that the UK is scheduled to leave the EU on 29 March 2019, the UK is still proposing to adopt those minimum standards required to be implemented by Member States by 1 January 2020. (It is likely that the UK will be required to comply with the Directives during any Brexit transition period, and this period is currently anticipated to last from 29 March 2019 to 31 December 2020.)
These changes will likely be of particular relevance to banking and capital markets institutions. Following a review for conformity between the existing UK hybrid legislation and the Directives, the UK government has identified changes required in relation to the rules concerning permanent establishments and regulatory capital. The draft measures in Finance Bill 2018/19 to effect these changes from 1 January 2020 (with commencement provisions for straddling periods) are subject to enactment in Finance Act 2019.
For completeness, the need for any further changes to comply with those Directive requirements that must be implemented by 1 January 2022 (including rules aimed at reverse hybrids – entities regarded as transparent where they are located but opaque at investor level) will be considered further by the UK in due course.
