On March 10, Royal Decree 04 / 2021 of 09 March was published in the Spanish Official Gazette to transpose into Spanish regulations EU Directive 2016 / 1164 (modified by EU Directve 2017 / 0952) which regulates hybrid mismatches.
This regulation is passed for cases in which Corporate income taxpayers take profit of the gaps between national fiscal systems with the purpose of reducing their overall tax debt, for example, through a double deduction (this is to say, a deduction on both sides of the border) or a deduction of a relevant income on one side of the border while this is not taxed on the other. In order to neutralize the effects of these hybrid mismatches, the Directive sets rules according to which one of the two jurisdictions will deny the deduction of a payment that leads to such results.
✔ It is very important to take into account that the Directive does not aim at altering the general characteristics of a particular jurisdiction but solely at handling the mismatches deriving from discrepant tax rules between two or various jurisdictions. Consequently, it is not focused on situations in which tax is not paid or only a reduced tax is paid due to a low tax or to the particular tax scheme of a relevant jurisdiction.
✔ Accordingly, Spanish tax regulations establish that the limitations shall not apply when the mismatch is due to the fact that the beneficiary is exempt from taxes, is produced in the context of a transaction based on a financial contract or instrument subject to a special scheme or when the difference in the imputed value is due to valuation differences, including those derived from the application of transfer pricing rules.
✔ Spanish Corporate income tax regulations incorporate a new article 15 bis in the Spanish Corporate income tax Law (CITL), with effects in tax periods starting as from January 01, 2020 and, pay attention, that have not concluded on March 11, 2021.
✔ The rules on hybrid mismatches are only applicable to cases between a taxpayer and an associated enterprise such as:
- Tax related cases as ruled out in CITL: tax – related individuals or entities according to article 18 of Spanish CITL.
- Voting rights: an entity holding, directly or indirectly, a participation of at least 25% in the taxpayer’s voting rights or having right to receive at least 25% of the taxpayer’s profits or in which the taxpayers holds such participations or right.
- Joint action: a person / entity on which the taxpayer jointly acts with another person / entity with respect to the voting rights or the share capital property, or the person / entity jointly acting with another with respect to the voting rights or share capital property of the taxpayer.
- Significant influence: a company on whose management the taxpayer has a significant influence or an entity having a significant influence in the taxpayer’s management (when there is a capacity to intervene in the financial policies and exploitation decisions of another entity, without having the control or joint control of such entity).
In order to neutralize the effects of these hybrid mismatches, the Directive sets rules according to which one of the two jurisdictions will deny the deduction of a payment that leads to such results.
Let us see which case are treated by the Spanish Corporate income tax regulations and how are these resolved.
✔ The cases that are dealt with by Spanish tax regulations are focused on:
1.Deduction without inclusion:
An expense or loss is deductible in a territory whereas it is not considered as taxable income in the country of the beneficiary due to the existence of different qualifications of the expense or of the legal nature of the taxpayers involved.
For example, a case of mismatch of a hybrid entity consists of:
- An entity is not considered as a flow – through transparent in the jurisdiction where it has been set up and is, therefore, entitled to deduct payments made to the shareholder.
- However, if the entity is considered as a flow – through transparent entity in the shareholder’s jurisdiction, payments to this latter entity shall not be recognised and will not be included in the shareholder’s taxable income, giving rise to a deduction without inclusion.
2. Double deduction:
The same expense is deductible in two countries or territories.
For example, a case of mismatch of hybrid entity consists of:
- An entity is not considered as a flow – through transparent entity in the jurisdiction where it has been set up and is, therefore, entitled to deduct payments made to the shareholder.
- If the same entity is considered as a flow – through transparent entity in the jurisdiction of the share capital holder, these expenses could be deducted in the shareholder’s taxable base, giving rise to a double deduction.
3. Hybrid pemanent establishments:
It relates to cases of deduction without inclusion or double deduction caused by the difference in the recognition of income and expenses. A permanent establishment mismatch may also derive from cases when the economic activities in a jurisdiction are considered to be carried out through a permanent establishment by one jurisdiction while they are not considered to be carried out through a permanent establishment by the other.
4. Imported mismatches or structured mechanisms:
This case is related to the existence of a third entity situated in another country or territory but which gives rise to a tax – deductible expense in Spain. Imported mismatches derive from mechanisms in which members of a group participate or from structured mechanisms in general, that transfer the effect of a hybrid mismatch between parties of third countries to the jurisdiction of a Member State by using a non hybrid instrument. A mismatch is imported into a Member State if a tax deductible payment with the use of a non hybrid instrument is used to finance expenses based on a structure arrangement which implies a hybrid mismatch between third parties. This implies a funds flow out of the EU which are not subject to taxes.
5. Double use of withholding taxes:
For the purposes of the double taxation tax credit.
6. Double tax residency:
A double tax residency mismatch may give rise to a double deduction if a payment is deducted according to the rules of the two jurisdictions where the taxpayer is resident.
As a solution for each case of hybrid mismatch a primary rule is approved, the most appropriate to treat the mismatch, as well as a secondary rule, that will result applicable when the primary rule has not been applied either because there is a discrepancy in the Directive transposition or because a third country has participated in the relevant transaction.
- Mismatch in financial instruments / hybrid entities, giving rise to a deduction without inclusion:
- Primary rule (PR): expense is not tax deductible in Spain.
- Secondary rule (SR): income is taxed when Spain is the country of the beneficiary or of the investor and the expense deduction has been permitted in the country of the payor.
- Mismatch giving rise to a double deduction:
- PR: expense is not tax deductible when it is the investor’s country.
- SR: expense is not deductible when Spain is the country of te payor and the investment country has not denied the expense deduction.
- Mismatch of hybrid permanent establishment, giving rise to a deduction without inclusion:
- PR: expense is not tax deductible in Spain.
- Imported mismatches / structured mechanisms: expense is not tax deductible in Spain.
- Mismatch in the double use of withholding taxes: the withholding tax is only deductible in the proportion relating to taxed income derived from a tax –related party not resident in Spain.
- Mismatched related to fiscal residence if it takes place:
– With third countries that do not deny the expense deduction which is offset against income and that do not generate double inclusion income: expense is not tax deductible in Spain.
– Between Member States with a Double taxtion agreement (DTA): the expense is only tax deductible if, according ot te DTA, the taxpayer is tax resident in Spain.
Given the complexity of these tax rules as well as the multiple cases to which they may apply, it will be necessary to pay attention to the tax authorities interpretation of these new regulations.
Publicado el 04-2021 por PBS - Mismatch in financial instruments / hybrid entities, giving rise to a deduction without inclusion:
