August 4, 2020
Portugal transposes EU ATAD Directives regarding hybrid mismatches into domestic tax law
Portuguese Law nr. 24/2020 (Law 24/2020) was published in the Official Gazette on 6 July 2020 in order to transpose the Council Directive (EU) 2017/952 of 29 May 2017 (ATAD 2) and Council Directive (EU) 2016/1164 (ATAD 1) regarding hybrid mismatches.
The ATAD 1 was presented by the European Commission as part of the Anti-Tax Avoidance package in January 2016, to provide for coordinated implementation, across the European Union (EU), of a specific set of anti-tax avoidance provisions, namely, interest deduction limitation rules, controlled foreign corporation rules, hybrid mismatches rules within the EU, exit taxation rules and a general anti-abuse rule.
By means of Law nr. 32/2019, Portugal transposed rules covering the ATAD 1’s elements above, except for the anti-hybrid mismatches provisions, which were now transposed into domestic law under Law 24/2020.
In this regard, Law 24/2020 introduced certain rules to the Portuguese Corporate Income Tax (CIT) Code against tax avoidance actions, in particular, with respect to hybrid mismatches that directly affect the internal market.
This Tax Alert summarizes the ATADs 1 and 2 elements transposed into the Portuguese Tax Law.
Law 24/2020 provides definitions for a number of concepts that are relevant for the anti-hybrid mismatches provisions that are introduced, such as hybrid mismatches, dual inclusion income, double deduction, deduction without inclusion, hybrid entity, and hybrid transfer, among others.
Hybrid mismatch means a situation involving a taxpayer or an entity under any of the following circumstances:
Hybrid entities are those entities or mechanisms regarded as taxable entities under the laws of one jurisdiction and whose income or expenditure is treated as income or expenditure of one or more other persons under the laws of another jurisdiction (e.g., tax transparent entities).
Associated enterprises and structured arrangements
The outcome of a mismatch should only be regarded as a hybrid mismatch when arising between “associated enterprises,” a taxpayer and an associated enterprise, the head office and a PE, between two or more PEs of the same entity or resulting from a “structured arrangement.”
For this purpose, the concept of associated enterprise is generally considered met under the following situations (with some particularities further detailed in Law 24/2020):
If no “associated enterprise” could be identified, anti-hybrid mismatch provisions may still apply if a structured arrangement is deemed to exist.
A structured arrangement is defined as 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, unless the taxpayer or an associated enterprise could not reasonably have been expected to be aware of the hybrid mismatch and did not share in the value of the tax benefit resulting from the hybrid mismatch.
Hybrid mismatches outcomes
Generally speaking, Law 24/2020 distinguishes between the following mismatch outcomes:
Rules applicable to hybrid mismatches
The deduction of expenses shall be denied in the following situations (although some exceptions may apply):
The following income should be included in the taxable income of the taxpayer (although some exceptions may apply):
Reverse hybrid mismatches
Where one or more associated nonresident entities holding in aggregate a direct or indirect interest of at least 50% of the share capital, voting rights or rights to a share of profit in a hybrid entity incorporated or established in Portugal are located in a jurisdiction or jurisdictions that regard the hybrid entity as a taxable person, the hybrid entity shall be regarded as a Portuguese tax resident entity and taxed herein.
The above shall not be applicable if the income of the hybrid entity is taxed under Personal Income Tax or CIT, in the sphere of individuals or entities, or in accordance with the legislation of the other jurisdiction(s). The above shall not apply to a collective investment vehicle.
Tax residency mismatches
Expenses or losses of a taxpayer, resident for tax purposes in Portugal and in another jurisdiction, that are deductible from the taxable base in Portugal and in the other jurisdiction, should not be deductible for tax purposes in Portugal to the extent that the other jurisdiction allows the duplicate deduction to be set-off against income that is not dual-inclusion income.
When the other jurisdiction is an EU Member State, the above should only be applicable if the taxpayer is considered resident for tax purposes in that EU Member State under the applicable Double Tax Treaty.
Entry into force
The law will be applicable to fiscal years starting as from 1 January 2020 (except for reverse hybrid mismatches, which will be delayed until 1 January 2022, as well as in situations connected with the loss-absorbing capacity for the banking sector, which will be delayed until 1 January 2023).
For additional information with respect to this Alert, please contact the following:
Ernst & Young S.A., International Tax and Transaction Services, Lisbon