Hybrid asymmetries

Royal Decree-Law 4/2021, of March 9 , introduces with effect for tax periods starting from of January 1, 2020 a new article 15 bis in the LIS , with the aim of transposing the Directive ( EU ) 2016/1164 of the Council, of July 12, 2016 regarding hybrid asymmetries that take place between Spain and other Member States and between Spain and third countries or territories.

Royal Decree-Law 4/2021 transposes a "primary rule" , understood as the solution considered appropriate to nullify the tax effects of hybrid asymmetry, and a "secondary rule" that will be applicable when the first has not been applied, either because there is a discrepancy in the transposition and application of the Directive even though all Member States have acted in accordance with it or because the hybrid asymmetry involves a third country or territory that does not have provisions to neutralise the effects of such asymmetries.

This adjustment may only be made when the taxpayer has a tax period of 12 months duration but which does not coincide with calendar year , or when the tax period is less than 12 months long. In both cases, it is necessary that in order to make the adjustment, the end date of the tax period is March 11, 2021 or later, that is, the tax period must end after the entry into force of Royal Decree-Law 4/2021, of March 9.

The new article 15 bis indicates in its section 1 , that expenses corresponding to operations carried out with related persons or entities resident in another country or territory will not be tax deductible that, as a consequence of a different tax classification in these of the expense or the operation, do not generate income, generate income that is exempt or subject to a reduction in the tax rate or to any deduction or tax refund other than a deduction to avoid legal double taxation.

If the income is generated in a tax period that begins within twelve months following the conclusion of the tax period in which the expense was incurred for the taxpayer, said expense will be tax deductible in the tax period in which said income is integrated into the tax base of the beneficiary.

In section 2 of article 15 bis of the LIS , it is established that expenses corresponding to operations carried out with related persons or entities resident in another country or territory will not be tax deductible which, as a result of a different tax qualification of the taxpayer in said country or territory, do not generate income, in the part that is not offset by income that generates double inclusion income.

The amount of the expenses not deducted by application of the provisions of the preceding paragraph may be deducted in the tax periods that end within three years following the conclusion of the tax period in which such expenses were accrued, to the extent that it is offset by income of the taxpayer that generates double inclusion income.

## The amount corresponding to transactions carried out with related persons or entities resident in another country or territory that, as a result of a different tax classification of these , has been considered a -deductible expense in that other country or territory , will be included in the tax base, in the part that is not offset by income that generates double inclusion income.

The amount included in the tax base by application of the provisions of the preceding paragraph may be reduced from the tax base of the tax periods that end within three years following the conclusion of the tax period in which the income was included, to the extent that such expense is offset in the other country or territory with income from the related person or entity that generates double inclusion income.

Article 15 bis of the LIS in its section 3 , states that expenses corresponding to operations carried out with related persons or entities resident in another country or territory that, as a result of a different tax classification of these in said country or territory and in that of its participant or investor, do not generate income, will not be tax deductible.

The provisions of the preceding paragraph shall also apply where a connection relationship exists exclusively between the taxpayer and the aforementioned participant or investor.

section 4 of article 15 bis of the LIS establishes that expenses corresponding to operations carried out with or by related persons or entities resident in another country or territory will not be tax deductible and, as a result of the different tax classification of these, are also tax deductible expenses in said related persons or entities, in the part that is not offset by income that generates double inclusion income.

The amounts not deducted in accordance with the provisions of the previous paragraph may be deducted in the tax periods that end within three years following the conclusion of the tax period in which such expenses were accrued , to the extent that they are offset by income from the related person or entity that generates double-inclusion income.

corresponding to operations carried out by the taxpayer will not be tax deductible when they are also considered tax deductible in the country or territory of a related person or entity as a result of a different tax qualification of the taxpayer, in the part that is not offset by income that generates double inclusion income.

The amounts not deducted in accordance with the provisions of the preceding paragraph may be deducted in the tax periods ending within three years following the conclusion of the tax period in which such expenses were accrued, to the extent that they are offset by the taxpayer's income that generates double-inclusion income.

Specifically, section 5 of article 15 bis of the LIS , indicates the following expenses that will not be tax deductible:

Expenses corresponding to transactions carried out with a permanent establishment of the taxpayer or of a related entity, or with a related entity that has permanent establishments, where as a result of a tax difference in their attribution between the permanent establishment and its head office, or between two or more permanent establishments, they do not generate income.

Expenditure corresponding to transactions carried out with a permanent establishment of the taxpayer or of a related person or entity which, because the establishment is not recognised for tax purposes by the country or territory, does not generate income.

Estimated expenditure of internal transactions carried out with a permanent establishment of the taxpayer, where such expenditure is recognised in an applicable international double taxation agreement, and where, under the law of the country or territory of the permanent establishment, it does not generate income, in the part that it is not offset by income of the permanent establishment which generates double-inclusion income.

The amount of expenses not deducted by application of the preceding paragraph may be deducted in the tax periods ending within the following three years, to the extent that they are included in the taxable income of the taxpayer with income of the permanent establishment which generates double-inclusion income.

Expenses corresponding to transactions carried out with or by a permanent establishment of the taxpayer which are also tax deductible in that permanent establishment or in an entity related to it, in the part that is not offset by income from said permanent establishment or related entity which generates double-inclusion income.

The amounts not deducted in accordance with the provisions of the preceding paragraph may be deducted in the tax periods ending in the three years following the end of the tax period in which such expenses were accrued, to the extent that they are offset against income of the related permanent establishment or entity generating double-inclusion income.

Section 6 of Article 15 bis of the LIS establishes that the provisions of Article 22 of the LIS will not apply in the case of income obtained through a permanent establishment that is not recognized for tax purposes by the country or territory of location.

In accordance with section 7 of article 15 bis of the LIS , expenses corresponding to a transaction or series of transactions carried out with related persons or entities resident in another country or territory will not be tax deductible when they finance, directly or indirectly, deductible expenses incurred within the framework of operations that generate the effects derived from the hybrid asymmetries referred to in the previous sections of this article, except when one of the countries or territories affected has made an adjustment to avoid the deduction of the expense or subject the income to taxation, under the terms set forth in said sections.

In section 8 of article 15 bis of the LIS , it is provided that the amount of the withholding made on account of the same will be deductible in the full amount of this Tax in the proportion that corresponds to the income included in the tax base obtained in a hybrid transfer made with a related person or entity not resident in Spanish territory.

For these purposes, is considered a hybrid transfer any transaction relating to the transfer of a financial instrument when the underlying performance of the transferred financial instrument is considered, for tax purposes, to have been obtained simultaneously by more than one of the parties involved in the transaction.

section 9 of article 15 bis of the LIS specifies that the provisions of the previous sections of this article 15 bis shall also apply when the operations to which they refer, regardless of whether they are carried out between related persons or entities or not, take place within the framework of a structured mechanism.

For these purposes, is considered a structured mechanism any agreement, legal transaction, scheme or operation in which the tax advantage derived from the hybrid asymmetries referred to in said sections in the terms indicated therein, is quantified or considered in its conditions or considerations or which has been designed to produce the results of such asymmetries, except that the taxpayer or a person or entity linked to him could not have reasonably known them and did not share the indicated tax advantage.

section 10 of article 15 bis of the LIS establishes that expenses or losses that are tax deductible in another country or territory in which the taxpayer is also a tax resident will not be tax deductible, in the part that is offset by income that does not generate double inclusion income.

Where such expense is offset in the other country or territory in a tax period subsequent to the deduction of the expense or loss on the taxpayer, the taxpayer must include the amount corresponding to the aforementioned amount in the tax period in which this occurs.

The provisions of the previous paragraph shall not apply when the other country is a Member State of the European Union with which Spain has signed an agreement to avoid international double taxation by virtue of which the taxpayer is considered a tax resident in Spanish territory.

Section 11 of Article 15 bis of the LIS introduces the following explanation, indicating that for the purposes of the provisions of this Article 15 bis, an income is considered to generate double inclusion income when it is subject to taxation under this law and the legislation of the other country or territory.

section 13 of article 15 bis of the LIS explains that, for the purposes of applying the provisions of this article 15 bis, the reference to related persons or entities will include:

• The persons or entities linked in accordance with the provisions of article 18 of the LIS.
• An entity which holds, directly or indirectly, an interest of at least 25 per cent in the voting rights of the taxpayer or is entitled to receive at least 25 per cent of the profits of the taxpayer, or in which the taxpayer holds such an interest or rights.
• The person or entity in respect of which the taxpayer acts jointly with another person or entity regarding the voting rights or ownership of the capital of the latter, or the person or entity acting jointly with another person or entity regarding voting rights or ownership of the capital of the taxpayer.

The provisions of the previous paragraph shall not apply when the other country is a Member State of the European Union with which Spain has signed an agreement to avoid international double taxation by virtue of which the taxpayer is considered a tax resident in Spanish territory.

An entity over whose management the taxpayer has a significant influence or an entity that has a significant influence over the management of the taxpayer. For these purposes, it is considered that there is significant influence when an entity has the power to intervene in the financial and operating policy decisions of another entity, but does not control or exercise joint control over that entity.

Article 15 bis in its section 14 states that, the provisions of the previous sections will not apply when the hybrid mismatch is due to the beneficiary being exempt from the Tax, occurs within the framework of an operation or transaction based on a financial instrument or contract subject to a special tax regime, or when the difference in the imputed value is due to valuation differences, including those arising from the application of the regulations on related-party transactions.

The second Final Provision, of Royal Decree Law 18/2022, adds a new section 12 in article 15 bis of the LIS with which the mandate of article 9 is transposed into the Spanish legal system. bis of Directive ( EU ) 2016/1164, in the wording given by Directive ( EU ) 2017/952 as regards hybrid asymmetries with third countries, in the case of inverted hybrid asymmetries, forcing Member States to treat fiscally transparent entities as residents that are considered by the legislation of the countries of residence of their majority shareholders as entities subject to taxation on income to avoid a situation of hybrid asymmetry in which certain income is not taxed in any country or territory, that is, it is not taxed either at the headquarters of the entities under the income attribution regime or at the headquarters of its participants or the entity paying said income.

Thus, an entity under an income attribution regime in which one or more entities, linked to each other, participate directly or indirectly on any day of the year, in the capital, in the equity, in the results or in the voting rights in a percentage equal to or greater than 50 percent and are resident in countries or territories that qualify the entity under an income attribution regime as a taxpayer for personal income tax, will pay corporate tax, as a taxpayer, on certain positive income that must be attributed to all participants who are residents of countries or territories that consider the entity under an income attribution regime as a taxpayer for personal income tax.