Hybrid mismatches

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:

  1. Tax related cases as ruled out in CITL: tax – related individuals or entities according to article 18 of Spanish CITL.
  2. 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.
  3. 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.
  4. 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).
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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: