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Spain enacts ATAD 2 anti-hybrid rules

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March 2021

In brief

The Spanish government on March 9 amended the Corporate Income Tax (CIT) law and the Non-Resident Income Tax (NRIT) law to address hybrid mismatches.  The stated purpose of these amendments is to enact into Spanish domestic law the anti-hybrid rules included in EU Directive 2016/1164, dated July 12, 2016 (‘ATAD 1), as amended by EU Directive 2017/952, dated May 29, 2017 (ATAD 2).  

The Royal Decree law was published in the Spanish Official Gazette on March 10, 2021 and entered into force the following day. The new rules effectively apply to tax years not finalized when the new rules entered into force (March 11, 2021).   

Given the effective date of the new rules, MNEs with interests in Spain should consider whether any hybrid mismatches already are negatively impacting their current tax year and address them accordingly.

The ATAD 2 Directive and its implementation into Spanish law

The ATAD 1 and ATAD 2 Directives were approved as part of the Anti-Tax Avoidance Package presented by the European Commission in 2016, following the OECD’s BEPS Project. They aim to create a minimum level of protection against corporate tax avoidance throughout the European Union.

Member States had an implementation deadline of December 31, 2018 for the majority of ATAD 1 rules, whereas most ATAD 2 provisions (which dealt specifically with hybrid mismatches) had to be transposed into domestic legislation by the end of 2019.

On November 30, 2020, the Spanish Ministry of Finance published a draft bill for the adoption of ATAD 2 for public consultation. The expectation was that, after considering comments from the public, the government would send the bill to Parliament.  However, on March 9, 2021, the Council of Ministries approved Royal Decree law 4/2021, amending the CIT law and the NRIT law with regard to hybrid mismatches (RDL 4/2021). 

Observation: Decree laws allow the government to issue legislative provisions, “in cases of extraordinary and urgent need.” The preamble to RDL 4/2021 justifies the use of a decree law to transpose ATAD 2 provisions since implementation should have taken place by December 31, 2019 and the European Commission had initiated an infringement procedure against Spain.

RDL 4/2021 was published in the Spanish Official Gazette on March 10, 2021 and entered into force the following day. The amendments apply to tax years commencing on or after January 1, 2020, to the extent that these had not ended when the legislation entered into force (i.e., March 11, 2021).

Observation: Given that Spanish companies cannot have a tax year lasting longer than 12 months, the anti-hybrid rules will apply, in practice, to all tax periods ending on or after the entry-into-force date. Effectively, this includes FY21 for all calendar-year companies, but many fiscal-year taxpayers may already see the impact of the new rules in their FY20/21 tax year.


The ATAD2 Directive preamble points out that rules on hybrid mismatches should address mismatch situations “which result from double deductions, from conflict in the characterization of financial instruments, payments and entities, or from the allocation of payments. Since hybrid mismatches could lead to a double deduction or to a deduction without inclusion, it is necessary to lay down rules whereby the Member State concerned either denies the deduction of a payment, expenses or losses or requires the taxpayer to include the payment in its taxable income, as appropriate.” 

While Spain already had some limited-scope anti-hybrid rules, the ATAD2 provisions now transposed into Spanish domestic legislation through RDL 4/2021 aim to cover the entire spectrum of hybrid mismatches arising between Spain and other jurisdictions. These rules generally will come into play only if the parties (located in different territories) to the arrangement are related, or when there is a structured arrangement - i.e., an arrangement involving a hybrid mismatch where the mismatch outcome is priced into the terms of the arrangement or an arrangement that has been designed to produce a hybrid-mismatch outcome. 

Observation: The concept of related parties for purposes of the anti-hybrid rules is expanded to include entities over which the taxpayer exerts a ‘significant influence,’ as well as situations where several persons are ‘acting together’ with respect to the voting rights or capital ownership of an entity.

In particular, the new rules address the following situations:

  • Mismatches deriving from the use of a hybrid instrument. The new rules deny the expense deduction (‘primary rule’ in the BEPS/ATAD parlance) if (1) the payer is in Spain and (2) the mismatch (which must be due to differences in the characterization of the instrument or transaction) results in no income being recognized in the other jurisdiction or the income is exempt (a deduction with no inclusion or ‘D/NI’ outcome). Importantly, the deduction will also be disallowed if the income benefits from any tax rate reduction, or when the income is entitled to any tax relief or refund other than an ordinary tax credit. However, a deduction will be allowed if the income is included in the payee’s taxable base in a tax year beginning within a 12-month period following the end of the tax year when the expense was accrued in Spain. The “secondary rule” (denial of the exemption when Spain is the payee) was already part of the participation exemption regime and is not modified.
  • Hybrid entity payer rules. These rules aim to neutralize D/NI outcomes resulting from transactions with related parties where the hybrid outcome is a result of differences in the characterization of the payer entity. When the hybrid entity is in Spain and the other jurisdiction does not recognize the income resulting from the transaction, the deductibility of such expense will be denied in Spain to the extent that it is not offset by dual inclusion income (DII). For these purposes, DII is defined as income subject to tax both in Spain and the other jurisdiction. Amounts not deducted in the current tax year may be offset against DII generated during the subsequent three years.

Implementing the secondary rule, Spain will tax the income, to the extent that it is not offset by DII in the payer’s jurisdiction, when the investor/payee is in Spain and the payer’s jurisdiction has considered the expense as deductible. This taxation may be reversed if, during the subsequent three years, the expense is offset in the payer’s jurisdiction against DII.

Observation: The Spanish rules arguably expand the scope of ATAD 2 by applying the anti-hybrid rules to all types of expenses and not only to ‘payments.’ Cost of goods sold, depreciation, and amortization charges could therefore be disallowed if deemed to create a hybrid mismatch.

  • Hybrid entity payee rule. A D/NI mismatch arises when, as a result of differences in the characterization of the payee, an expense arising from a transaction with a related party is deductible in the hands of the payer without generating income in the payee’s hands. In order to address this mismatch, the deductibility of the expense is denied when the payer is in Spain. The same primary rule applies to expenses accrued from transactions with permanent establishments (PEs) and resulting in a deduction without inclusion outcome (either due to differences in the allocation of income between the PE and the head office and/or due to the PE being disregarded).

Making use of the option allowed by ATAD 2, Spain has not enacted the secondary rule foreseen for these situations.

  • Deemed payments rule. A D/NI outcome can also result from internal dealings between a head office and one of its foreign PEs, or between two Pes—located in different jurisdictions—of the same head office, when one of the jurisdictions allows the deduction of an expense resulting from an internal dealing while the other jurisdiction does not recognize any income. In this case, Spain will deny the deductibility of the expense, to the extent that it is not offset by DII. Amounts non-deducted in the current tax year may be offset against DII generated during the subsequent three years.

Observation: This rule may have little practical impact as Spain only allows the deduction of deemed payments resulting from internal dealings when an applicable tax treaty expressly allows it. To date, only the new treaty with Japan allows deemed payments to be taken into account.

  • Disregarded PEs. In order to avoid double non-inclusion situations, Spain will not apply the branch exemption to the extent that the foreign PE is disregarded in the jurisdiction where it is located. 
  • Double deduction mismatches. The new rules address double deduction (DD) situations arising when an expense accrued by a hybrid entity is regarded as deductible both in the payer’s (the hybrid entity) and the investor’s jurisdictions. Spain has enacted both the primary rule, denying the deductibility of the expense in situations where the investor is in Spain, and the secondary rule, denying the deduction when the payer is in Spain. In both cases, the deduction is still allowed to the extent offset by DII and, as in the situations above, amounts not deducted in the current tax year may be offset against DII generated during the subsequent three years. Equivalent rules apply to double deduction situations involving PEs.

Observation: The DD rules (and also the hybrid entity payer rule) may have a substantial impact in the case of US MNEs with Spanish subsidiaries that are treated as disregarded entities for US tax purposes. In those situations, and subject to the interaction with the US dual consolidated loss rules, the expenses of the Spanish entity could be creating a double deduction and hence would be at risk of being denied to the extent not offset by DII. 

  • Imported mismatches. The imported mismatch rule is incorporated by denying the deductibility of expenses corresponding to cross-border transactions with related parties when the expense directly or indirectly funds deductible expenditure giving rise to a hybrid mismatch, except to the extent that the hybrid mismatch has been corrected in one of the other jurisdictions involved.

Observation: As shown by the experience in other jurisdictions that have implemented similar provisions, the broad scope of the imported mismatch rule can present challenges for both taxpayers and taxing authorities.

RDL 4/2021 also adopts the ATAD 2 rules concerning dual-resident entities and hybrid transfers. However, the Spanish government believes there is no need to enact the reverse hybrid mismatch rule included in article 9 bis of the Directive, on the grounds that the design of the Spanish tax system prevents these situations from arising.

Finally, the enacted legislation clarifies that the anti-hybrid rules will not apply when the mismatch arises because: 

  • the payee is exempt from income tax, 
  • the financial instrument concerned is subject to a special tax regime, or
  • there are valuation differences. 

The takeaway

MNEs with interests in Spain should assess the impact of the ATAD 2 anti-hybrid rules.  The rules could impact the deductibility of expenses or could tax certain income items. Taxpayers should identify and address potential hybrid mismatches, including imported mismatch rules and entities that may be disregarded for non-Spanish purposes. Given the rules’ effective date, any hybrid mismatches already could be negatively impacting an MNE’s current tax year.


Contact us

Maarten Maaskant

International Tax Desk Leader, PwC US

Carlos Concha

Partner, PwC US

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