Spain has published Decree-Law 4/2021, which was approved by the Council of Ministers on 9 March 2021. The Decree-Law follows a draft law previously consulted on by the Ministry of Finance and includes amendments to the Corporate Tax Law and the Non-Resident Income Tax Law for the implementation of the hybrid mismatch rules of the EU Anti-Tax Avoidance Directive as amended (ATAD2), except for the rules regarding reverse hybrids.

The measures of Decree-Law 4/2021 are in line with ATAD2 and include rules to address hybrid mismatches resulting in double deduction and deduction without inclusion outcomes. In general, this includes that where operations with related parties or entities residing in another country or territory result in a hybrid mismatch, the expenses or losses corresponding to the operation will be non-deductible for tax purposes in Spain. However, rules are provided that allow the deduction of expenses, including where taxable income for the related party is generated in the tax period beginning within 12 months following the tax period in which the expense is accrued. Further, expenses are allowed to the extent that they are offset with taxpayer income that generates dual inclusion income.

With respect to income received, it is provided that where operations with related parties or entities residing in another country or territory result in a tax-deductible expense for the related party, income will be included in in the taxpayer's tax base in Spain, in the part not compensated with income that generates double inclusion income. Rules are also provided to reduce the amount of income, including where the expense of the related person is offset with income that generates dual inclusion income within three years.

In addition to the hybrid mismatch provisions, related amendments are made in respect of the 30% of net profit limit for deducting net financial (interest) expenses. This includes provisions to exclude non-deductible expenses as per the new hybrid mismatch rules in determining net interest expense.

Decree-Law 4/2021 entered into force on 11 March 2021 and is effective for tax periods beginning on or after 1 January 2020 that have not yet concluded as of 11 March 2021.

Note, the hybrid mismatch rules were implemented via Decree-Law instead of through approval in parliament given the urgent need to implement the rules due to infringement proceedings by the European Commission.