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Royal Decree-Law 4/2021 about the modification of the Corporate Income Tax and Non-Resident Income Tax

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Publication of Royal Decree-Law 4/2021, of 9th March, amending Law 27/2014, of 27th November, on Corporate Income Tax, and the revised text of the Law on Non-Resident Income Tax, approved by Royal Legislative Decree 5/2004, of 5th March, in relation to hybrid disparities

Introduction.

Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market regulates in Article 9 the tax treatment to be given to "hybrid disparities", understood as situations involving related persons or entities in which payments are made that give rise to a deduction without inclusion or a double deduction.

Royal Decree-Law 4/2021 transposes into Spanish law the rules contained in the Directive on such hybrid mismatches, broadening the scope of the concept of "related person or entity" with respect to that already contained in Article 18 of the Corporate Income Tax Law (LIS), and introducing the following measures:

Corporate income tax measures.

The new measures adopted are applicable to hybrid mismatches that occur between Spain and other Member States and between Spain and third countries or territories. It is therefore necessary to establish a double mechanism to avoid possible erosion of tax bases.

On the one hand, the "primary rule" will apply, understood as the solution considered appropriate to cancel out the tax effects of the hybrid mismatch; on the other hand, a "secondary rule" is envisaged in certain cases, which will be used when the first rule has not been applied due to the lack of transposition of the Directive in the other Member State or because a third State is involved in the hybrid mismatch.

The first of the amendments introduced by Royal Decree-Law 4/2021 is the introduction of a new article 15bis LIS. This article establishes that:

1. Expenses relating to transactions with related persons or entities resident in another country or territory which, as a result of a different classification, are not tax deductible:

a. They do not generate income, generate exempt income or income subject to reduction, deduction or refund, other than the deduction for the avoidance of double taxation. If the income is generated in the subsequent tax period, such expenditure shall be tax deductible in the period in which the income is included in the tax base.

b. In that state or territory, it has not been offset against income which generates double taxation income[1]. Such expenditure will be deductible in the following three years, to the extent that offsetting double-inclusion income is generated.

c. Of such transactions, in that country or territory and in the country or territory of its participant or investor, do not generate income.

d. Are tax-deductible expenses in related persons or entities, to the extent that they are not offset by income that generates double-inclusion income. Such expenditure shall be deductible in the following three years to the extent that it is offset by offsetting double-inclusion income.

2. Expenses relating to transactions carried out with a permanent establishment (PE) of the taxpayer or of a related entity shall also not be considered deductible for tax purposes:

a. When, because of a tax difference in their attribution between the PE and the head office, they do not generate income.

b. When, because of the non-recognition of the PE in the country or state, they do not generate income.

c. Estimates on internal operations, in the cases in which they are so recognised in an applicable IDC, when, due to the internal legislation of the country or state, they do not generate income, in the part of the expenses that are not compensated with income of the PE that generates double inclusion income.

d. They are tax deductible in that PE or an entity related to it, to the extent that they are not offset against income of that PE or related entity.

On the other hand, this new article of the LIS stipulates that:

  • The exemption of income obtained abroad through a PE, described in Article 22 LIS, does not apply to income obtained from a PE that is not recognised for tax purposes in the third country or territory.
  • In certain cases, expenses corresponding to transactions with related persons or entities that directly or indirectly finance deductible expenses incurred in the context of transactions that generate the effects of hybrid disparities will not be tax deductible.
  • All the above-mentioned provisions shall apply equally whenever transactions take place within the framework of a structured mechanism.[2].
  • Losses that are deductible in another country or territory in which the taxpayer is resident for tax purposes will not be tax deductible to the extent that they are offset against income that does not generate double inclusion income. If such an expense is offset in another country or territory in a subsequent year, it is in that year that it can be included in the tax base.

Finally, section 13 of the new article 15bis LIS provides for the existence of certain cases in which the limitations do not apply. Among others, when the hybrid disparity is due to the beneficiary being exempt from tax, when it occurs within the framework of an operation or transaction based on a financial instrument subject to a special tax regime or when the difference in the imputed value is due to valuation differences.

As a final measure, article 16 LIS, relating to the limitation on the deductibility of financial expenses, is amended in the sense that, for the calculation of net financial expenses, those which, in accordance with the new article 15 bis, are not deductible are excluded.

Measures in Non-Resident Income Tax.

Article 18, relating to the determination of the tax base of PEs in Spain of non-resident entities, is amended in the sense that, without prejudice to the reference to the rules of Corporate Income Tax (and, therefore, to its new article 15 bis), it expressly regulates the non-deductibility of the following expenses incurred by a PE for transactions with the head office or any other of its PEs or with any person or entity related either to the head office or to the PE:

a. Expenses which, because of a tax difference in their attribution between the PE and its head office, or between two or more PEs, do not generate income.

b. Estimated expenses which, due to the legislation of the country or territory of the beneficiary, do not generate income, to the extent that they are not offset by income that generates double-inclusion income.

c. Expenses that are also tax deductible at the head office, to the extent that they are not offset by income of the permanent establishment or related entity that generates double-inclusive income.

d. Expenses which, because of the PE not being recognised in the country or territory of location, do not generate income.

 

For further information please contact:

 

María Olleros  | Partner

maria.olleros@es.Andersen.com

Nicolás Díaz | Senior Associate

nicolas.diaz@es.Andersen.com

Álvaro Calderón | Associate

alvaro.calderondelabarca@es.andersen.com

 

[1] According to Article 15a of the LIS, income is considered to generate double-inclusion income when it is subject to taxation under the LIS and the legislation of another country or territory.

[2] According to Article 15bis LIS, a structured arrangement means any arrangement, structure or scheme designed to take advantage of any hybrid mismatch or designed to produce the results of such a mismatch.

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