Transposition of the European anti-hybrid legislation into the Corporate Income Tax

Last 10 March 2021 the Spanish Official State Gazette (BOE) published the Royal Decree-Law 4/2021, of 9 March, which transposes into the Spanish law, the Council Directive (EU) 2016/1164 of 12 July 2016, amended by Council Directive (EU) 2017/952 of 29 May 2017 (Directive ATAD II), on hybrid mismatches to prevent tax avoidance in related-party transactions.

The transposition of the European regulations on “hybrid mismatches” to prevent tax avoidance in related-party transactions has been carried out through the introduction of amendments to the Corporate Income Tax Law (CIT).

“Hybrid mismatches” can occur between a taxpayer located in Spain (or a permanent establishment located in Spain of a non-resident entity) and a related person or entity located in another country, when the transactions they carry out, or the income derived from these transactions, have a different tax classification in Spain and in the other country.

“Hybrid mismatches” can deduct an expense in Spain without the corresponding income being taxed in the other country, or the deduction of the same expense or others, scenarios that allow to use these structures as a mechanism of taxable base erosion and profit shifting.

Royal Decree-Law 4/2021 of 9 March amends the Corporate Income Tax by introducing:

  • Article 15a on hybrid mismatches
  • Section 1 of Article 16 concerning financial charges is amended
  • Section j) of Article 15 is repealed

Article 15 bis of the Corporate Income Tax sets out different types of hybrid mismatches, the concept for its application and events in which the article is not to be applied.

The following kind of hybrid mismatches can be identified from the wording of the article:

  • Mismatches of financial instruments.
  • Hybrid entities, with asymmetry of results like “deduction without inclusion”.
  • Inverse hybrid entities.
  • Mismatches in results like “double deduction”.
  • Mismatches of permanent establishments.
  • Permanent establishments not counted.
  • Regulated imported asymmetries.
  • Application of hybrid transfers generated by a double use of withholding taxes.
  • Application of the precept in the framework of a structured mechanism.
  • Mismatches related to tax residence.

The tax treatment of hybrid mismatches shall apply to the persons or entities listed below:

  1. Individuals or entities who are related under article 18 of the CIT.
  2. In addition to the following individuals or entities:
  • An entity that holds, directly or indirectly, an interest of 25% or more in the voting rights of the taxpayer or where it is entitled to receive at least 25% of its profits, or in which the taxpayer holds those interests or rights.
  • An individual or entity with respect to which the taxpayer acts together with another individual or entity in relation to its voting rights or its ownership; and an individual or entity that acts together with another entity in relation to the voting rights or ownership of the capital of the taxpayer.
  • An entity in which the taxpayer has a significant influence in its management, or an entity that has a significant influence in the management of the taxpayer. A significant influence is deemed to exist where the power is held to take part in the decisions on the financial policy and operations of another entity, without having control or joint control over it.

In relation to the cases in which Article 15 bis does not apply, section 13 of the Article states that it shall not apply where the hybrid mismatch is due to: (i) the beneficiary is exempt from tax, (ii) it occurs in the context of a transaction or transaction based on a financial instrument or contract subject to a special tax regime, (iii) or where the difference in imputed value is due to valuation differences, including those arising from the application of the rules on related-party transactions.

The amendment to Article 16 section 1 of the CIT, which refers to the deductibility of financial expenses, is due to the repeal of Article 15(j) and the replacement of the same, in Article 16(1), by the reference to Article 15bis of the CIT.

Royal Decree-Law 4/2021 of 9 March enters into force on 11 March 2021 and affects the financial years starting on or after 1 January 2020 that have not ended on that date.

The information contained in this note should not in itself be considered as specific advice on the matter under discussion, but only as a first approach to the subject matter, and it is therefore advisable that the recipients of this note obtain professional advice on their specific case before taking specific measures or actions.

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