Corporation Tax Act 2009 section 584

Hybrid derivatives with embedded derivatives

Section 584 explains how a derivative contract that contains one or more embedded derivatives is split into separate deemed contracts for corporation tax purposes.

• Where a company's derivative contract is not itself treated as a derivative for accounting purposes but contains embedded derivatives under GAAP, the contract must be split into its component parts for tax purposes.
• Each embedded derivative is treated as a separate relevant contract, and the remaining rights and liabilities (the "host contract") are also treated as a separate relevant contract, provided the host contract would itself qualify as a relevant contract.
• Each of these deemed separate contracts is then classified as an option, a future, or a contract for differences, depending on the nature of the rights and liabilities it contains.
• The original unsplit contract is known as a "hybrid derivative", and further rules apply to it regarding the conditions that embedded derivatives must meet and the disapplication of fair value accounting for certain embedded derivatives.