On March 10, 2021, Royal Decree-Law 4/2021, of March 9, 2021, was published, which transposes Council Directive (EU) 2016/1164 of 12 July 2016, amended by Council Directive (EU) 2017/952 of 28 May 2017 (ATAD II Directive), as regards “hybrid mismatches”, and amends the corporate income tax and nonresident income tax laws.
The term “hybrid mismatches” refers to scenarios in which non-taxation or double deduction of expenses occurs as a result of legal characterization differences in more than one country or territory. As the new royal decree mentions in its preamble, the purpose of transposition of the ATAD II Directive is to prevent these scenarios in transactions between Spain and other member states, as well as between Spain and third countries or territories, (i) where between the parties acting in the transaction there is an associated entity relationship, significant influence is exerted or they act together with respect to voting rights or capital ownership, and (ii) where the mismatch takes place under a structured arrangement.
For these purposes, the reference to related individuals and entities means:
i. Individuals or entities who are related under article 18 of the Corporate Income Tax Law (CIT Law) and article 15 of the Nonresident Income Tax Law (NRIT Law).
ii. In addition to the following individuals or entities:
a) 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.
b) 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 in relation to the voting rights or ownership of the capital of the taxpayer.
c) 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.
As we announced earlier when the draft legislation was published (see our alert on December 1, 2020), this new royal decree adds a new article 15bis to the CIT Law and two new points 6 and 7 to article 18 of the NRIT Law, with amendments in relation to the provisions in that draft legislation. Those amendments are designed, as a general rule, to bring the Spanish wording even closer to the provisions in the Directive, to make a decree that is complex by nature easier to interpret.
The wording states that expenses cannot be deducted or the ability to deduct them must be deferred, or otherwise taxable revenues must be added, in the following cases, if the tests expressly specified in the decree are met:
a) Deduction without inclusion: scenarios in which an expense is deductible in one territory whereas it is not treated as a taxable revenue in the country of the recipient (except in the cases mentioned below involving exemptions, financial agreements subject to a special tax regime or pricing differences as a result of applying the rules on controlled transactions), or is subject to reduction in the tax rate or to any deduction or refund of tax other than a credit to avoid legal double taxation, as a result of the existence of different characterizations of the expense or of the legal nature of the taxpayers involved.
b) Double deduction: scenarios in which a same expense is deductible in two countries or territories.
c) Hybrid permanent establishments: scenarios involving deduction without inclusion or double deduction stemming from differences in the recognition of revenues and expenses, or even from recognition of the actual existence of a permanent establishment, between the country where the permanent establishment is located and the country where the parent company is situated.
d) Imported mismatches, occurring where the mismatch takes place in relation to a third entity in another country or territory but gives rise to a deductible expense in Spain.
e) Structured arrangements, in which the generation of a deductible expense without any tax on the related revenue or of an expense deductible in two or more countries or territories forms part of the expected return under the arrangement (or the arrangement has been designed to produce exactly that outcome). For these purposes, a structured arrangement includes any agreement, transaction, scheme or transaction in which the tax advantage obtained from hybrid mismatches is priced into its terms, or which has been designed to produce the outcome of those mismatches, unless the taxpayer or a related individual or entity could not reasonably have been expected to be aware of them and does not share the tax advantage.
f) Double use of tax withholdings, for the purposes of the tax credit for international double taxation.
g) Double tax residence, where it means that an expense is tax deductible in two countries or territories at the same time.
Consistently with the above, an amendment is also made to article 16.1 of the CIT Law to state that the limit for the deduction of finance costs (30% of operating income in the period) must be calculated without taking into account any expenses that are not deductible under the new article 15.bis (on top of the already existing cases of expenses that are not deductible under letters g and h of article 15).
As we have mentioned, it needs to be highlighted that in the new article 15.bis of CIT Law (point 13), it has been added that the described legislation is not applicable (i) where the hybrid mismatch is due to the beneficiary being exempt from the tax, (ii) where it occurs in the context of a transaction based on a financial instrument or agreement subject to a special tax regime; or (iii) where the difference in attributed value is due to pricing differences, including any resulting from applying the legislation on controlled transactions.
This new legislation comes into force on March 11, 2021 and applies for periods that commenced on or after January 1, 2020 that have not ended on that date.