Spain implements ATAD II – our observations

On 10 March 2021, the Royal Decree-Law 4/2021 (RDL 4/2021), dated 9 March 2021, was published, implementing the Council Directive (EU) 2016/1164 of 12 July 2016, amended by Council Directive (EU) 2017/952 of 28 May 2017 (ATAD II), regarding hybrid mismatches, amending the Spanish Corporate Income Tax (CIT) and Non-Resident Income Tax Laws.

As per the entry into force clause, RDL 4/2021 entered into force on March 11, 2021, the day following its publication in the Spanish Official Gazette. These rules will be applicable to fiscal years commencing on or after 1 January 2020, which have not concluded before the law was passed and entered into force. This opens the door to retroactive effects in some cases where the fiscal year does not correspond to calendar year. It however implies that for certain companies whose fiscal year corresponds to the calendar year, these rules will only be applicable from 1 January 2021.

Given the infringement procedure initiated by the European Commission against Spain, due to the lack of timely implementation of this Directive, the Spanish Council of Ministers has finally approved the implementation of ATAD II by means of a royal decree-law (RDL) which does not require parliamentary approval to become applicable.Currently, a draft bill is being processed in the Congress, with identical content to that of RDL 4/2021, most likely aiming to avoid issues regarding the potential unconstitutionality of RDL 4/2021.

The term “hybrid mismatches” refers to scenarios in which double non-taxation is achieved by means of double deduction, deduction without inclusion and non-taxation without inclusion as a result of the legal characterization differences between jurisdictions. The implementation of ATAD II aims to prevent these scenarios in transactions between Spain and other Member States, as well as between Spain and third countries.

It must be noted that only the following hybrid mismatches are foreseen and regulated in the RDL 4/2021:

• Hybrid financial instruments: The qualification of a financial instrument or the payment made under it differs between two jurisdictions;
• Hybrid entity mismatches: Entities that are treated as transparent for tax purposes in one country and as non-transparent in another country;
• Reverse hybrid entities;
• Hybrids leading to a double deduction: Double deduction arising from a same payment, expense or loss;
• Hybrid permanent establishments (PEs) and disregarded PEs: Asymmetric tax attribution of transactions affecting the allocation of payments between the parent company and a PE and asymmetric recognition of the actual existence of a permanent establishment;
• Imported mismatches/structured arrangements;
• Hybrid transfers giving rise to double utilization of foreign tax credits: Arises when the underlying return on the financial instrument transferred is treated for tax purposes as being earned simultaneously by more than one of the parties to the transaction.
• Double tax residence: Situations where a taxpayer is resident for tax purposes in two or more jurisdictions;

At the same time, it must be highlighted that the RDL 4/2021 expressly excludes from the scope of the legislation:

• Hybrid mismatches due to the beneficiary being exempt from taxation;
• Hybrid mismatches arising in the context of a transaction based on a financial instrument or agreement subject to a special tax regime.
• Hybrid mismatches arising due to a difference in valuation, resulting from the application of the legislation of transfer pricing rules,

In line with the ATAD II, RDL 4/2021 establishes that the anti-hybrid provisions shall apply to hybrid mismatches occurring among unrelated parties in the context of a “structured arrangement”. The RDL defines the concept of “structured arrangement” and excludes arrangements in which the taxpayer could not reasonably know the result of the relevant mismatch and does not share the related tax benefit. For purposes of RDL 4/2021 references to related individuals and entities includes the following:

• Related parties as per Spanish transfer pricing provisions;
• An entity that holds, directly or indirectly, an interest of at least 25% 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 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.

RDL 4/2021 amends the earning-stripping rule included in the Spanish CIT Law to exclude from the interest tax deductibility limitation the interest expenses which are treated as not deductible under the anti-hybrid provisions.

The Spanish PE participation exemption is also amended, to limit the application of the exemption in the case of a disregarded PE. Unlike the November 2020 draft, the RDL 4/2021 makes no reference to tax treaties entered into by Spain, including a PE exemption.

Key takeaways

Multinational groups are advised to review in detail transactions and structures in order to identify taxation gaps which could be affected by RDL 4/2021 on hybrid mismatches. In this regard, a multi-jurisdictional approach should be adopted in order to evaluate the strategy to be implemented.It must be taken into consideration that some controversial issues arise from this new regulation. For example, the “reason to know”, regarding structured arrangements, has a high degree of subjectivity. We expect the Spanish tax authorities to clarify this new regulation, by means of binding rulings, in the near future.