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March 17, 2021

Spain implements EU ATAD 2: Detailed analysis

Executive summary

On 9 March 2021, the Spanish Council of Ministers approved the Royal-Decree Law (RDL) implementing the European Union (EU) Anti-Tax Avoidance Directive (Council Directive 2017/952 of 29 May 2017, “EU ATAD 2”) into the Spanish legislation, which was published in the Spanish Official Gazette on 10 March 2021 (See EY Global Tax Alert, Spanish Council of Ministers approves implementation of ATAD 2, dated 10 March 2021).

Although the final wording is generally in line with the draft released in November 2020 (See EY Global Tax Alert, Spain releases draft Bill implementing ATAD 2 for public consultation, dated 2 December 2020) and also with the EU Directive, the RDL includes certain particularities and technical issues which require additional interpretation, as detailed below.

Detailed discussion

The EU ATAD 2 requires that EU Member States include in their domestic legislation a number of anti-hybrid provisions in line with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 2. The Preamble to the RDL, unlike the November 2020 draft, acknowledges both the EU and the OECD developments as references for this domestic implementation.

As a result of this, and in line with the EU ATAD 2 itself, the interpretation of the Spanish provisions must be made not only following the EU rules and guidance, but also the OECD Reports in the context of BEPS Action 2 which serve as “soft law” for these purposes.

Approval procedure

The Spanish Council of Ministers has approved the EU ATAD 2 implementation as an RDL, which does not require Parliamentary approval to become applicable, as opposed to ordinary Laws. The RDL must be validated by the Spanish Congress within a thirty-day period following its publication.

This expedited approval process must be grounded on extraordinary urgency reasons, which, in the view of the Spanish Government, are supported in this specific case by the need to comply with the implementation deadlines of the EU Directive; the Spanish lack of compliance had already been noted by the European Commission which initiated an infringement procedure against Spain which could lead to significant penalties.

Hybrid mismatches

In line with the EU ATAD 2 (and the OECD BEPS work on hybrids), the RDL amends the Spanish Corporate Income Tax (CIT) and Nonresident Income Tax (NRIT) Laws to target specific fact patterns where either a “deduction/non-inclusion” (D/NI) or a “double deduction” (D/D) mismatch arises due to a hybrid element.

In particular, payments connected with the following fact patterns are treated as non-deductible for Spanish CIT and NRIT purposes:

  • Hybrid financial instrument
  • Hybrid entity mismatches
  • Hybrid permanent establishments (PEs) and disregarded PEs
  • Hybrids leading to a double deduction outcome
  • Reverse hybrids
  • Imported mismatches/structured arrangements
  • Double tax residence
  • Hybrid transfers giving rise to double utilization of foreign tax credits

The above is a numerus clausus list, which means that fact patterns which lead to the same or to an equivalent D/NI or D/D consequence through a different type of mismatch would not be impacted by these rules.

The provisions introduced as per the RDL are not applicable to the extent there is “dual inclusion income,” which is defined as income which is subject to tax under the rules applicable in Spain (CIT Law) and in another jurisdiction.

The RDL also includes “time-mismatch” clauses in the different hybrid mismatch definitions to account for those fact patterns where income recognition takes place within a reasonable period of time (12 months or 3 years, depending on the hybrid mismatch) due to the different timing provisions in the tax rules of the relevant jurisdictions.

Excluded mismatches

The RDL expressly excludes from the scope of the anti-hybrid provisions those mismatches arising from the following fact patterns:

  • Mismatches involving a taxpayer which is exempt from Spanish CIT. It remains to be seen whether being exempt from a tax identical or analogous to the Spanish CIT would also prevent the application of the anti-hybrid provisions.
  • Mismatches arising as a result of a financial instrument/agreement which is subject to a special tax regime.
  • Mismatches arising due to a difference in valuation, including those differences resulting from the application of Transfer Pricing (TP) rules; this exclusion is in line with the Preamble and scope of the EU ATAD 2.

Key definitions

For the purposes of defining the scope of transactions covered by the domestic implementation of EU ATAD 2, the concept of “associated enterprises” is broadened as compared to the traditional concept in the context of TP provisions and includes the following:

  • Related parties as per Spanish TP provisions
  • An entity owning, directly or indirectly, at least 25% of the voting and/or economic rights in the taxpayer
  • Entities/taxpayers “acting together” with respect to the voting and/or economic rights in another entity/a taxpayer
  • Entities/taxpayers having “significant influence” over one another

Unlike the draft released in November 2020, the RDL no longer includes a “minimum taxation threshold” preventing the application of the anti-hybrid provisions to financial instruments. This is in line with the EU ATAD 2 which does not establish a taxation threshold. In fact, to align all anti-hybrid provisions, the reference to the minimum 10% taxation already included in the Spanish CIT Law provision against hybrid financial instruments (EU ATAD 1 implementation) is deleted.

Thus, the RDL targets expenses incurred under hybrid financial instruments which are not viewed as generating income for the recipient, or are exempt, subject to a lower tax rate or to a tax credit or benefitting from a tax refund (with the exception of foreign tax credits). It is uncertain how broad the interpretation of this clause will be in practice.

In line with the EU ATAD 2, the RDL establishes that the anti-hybrid provisions shall apply to hybrid mismatches occurring among unrelated parties in the context of a “structured arrangement.” The RDL defines the concept of “structured arrangement” and excludes therefrom the arrangements in which the taxpayer could not reasonably know the result of the relevant mismatch and does not share the related tax benefit.

The RDL incorporates the concept of “hybrid transfer,” included in the EU ATAD 2, as those transfers of a financial instrument where the underlying return is treated for tax purposes as derived simultaneously by more than one of the intervening parties. The provision included in the Spanish CIT Law aims at preventing the double utilization of foreign tax credits.

Other provisions impacted by the EU ATAD 2 implementation

The RDL amends the earning-stripping rule included in the Spanish CIT Law to exclude from the interest tax deductibility limitation the interest expenses which are treated as not deductible under the anti-hybrid provisions.

The Spanish PE participation exemption is also amended, to limit the application of the exemption in the case of a disregarded PE. Unlike the November 2020 draft, the RDL makes no reference to tax treaties entered into by Spain, including a PE exemption.

Entry into force

The RDL entered into force on 11 March 2021, the day following its publication in the Spanish Official Gazette.

As per the entry into force clause, these rules are applicable to fiscal years beginning on, or after 1 January 2020 but which have not concluded on the date of entry into force. Thus, for companies following the calendar year, these rules will only be applicable from 1 January 2021.


Multinational groups should review their current structures and transactions to determine the practical impact of these rules, following either a “bottom-up” or a “top-down” approach depending on the anticipated Spanish tax implications and considering all the jurisdictions implied.

This impact must also be considered in light of the entry into force clause, given the potential retroactive effect to the beginning of the fiscal year and to transactions and arrangements which may have been implemented before this wording (or even the November 2020 draft) was released.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Abogados, Madrid

Ernst & Young LLP, Spanish Tax Desk, New York


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