EN ECB-PUBLIC  
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 3 September 2014 
on deferred tax assets 
(CON/2014/66) 
 
Introduction and legal basis 
On 9 June 2014, the European Central Bank (ECB) received a request from the Portuguese Minister of 
State and Finance for an opinion on a draft law establishing a special legal framework for the treatment of 
deferred tax assets (DTAs) of companies and State- owned enterprises, including credit institutions, that 
are liable for corporation tax (hereinafter the ‘draft law’).  
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and on th e sixth indent of Article 2(1) of Council 
Decision 98/415/EC1, as the draft law relates to rules applicable  to financial institutions insofar as they 
materially influence the stability of financial instit utions and markets. In accordance with the first 
sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council 
has adopted this opinion. 
 1.  Background and purpose of the draft law  
1.1 In line with Regulation (EU) No 575/2013
2 (hereinafter the ‘CRR’), since 1 January 2014 DTAs 
that rely on the future profitability of credit ins titutions to be realised are to be progressively 
deducted from the calculation of their Common Equi ty Tier 1 (CET1) capital, because such DTAs 
are not considered as fully ensuring loss absorbency in all scenarios, as required by Basel III 
standards3. Article 39(2) of the CRR provides that und er certain conditions DTAs arising from 
temporary differences are not consid ered to rely on future profitability. Such DTAs do not require 
to be deducted from a credit institution’s regula tory capital in accordance with Article 38 of the 
CRR. 
1.2 The draft law aims at addressing the negative effects on the level of regulatory capital of credit 
institutions and other companies4 arising from the deduction of DT As from that capital; for this 
                                                            
1  Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities 
regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 
2  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements 
for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1). 
3  See ‘Basel III: A global regulatory framework for more  resilient banks and banking systems’, Basel Committee on 
Banking Supervision, December 2010, revised version June 2011. 
4  The scope of this Opinion is restricted to the aspects of  the draft decree-law that relate to credit institutions. 
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2 purpose the draft law establishes a special scheme that permits certain types of DTAs to be 
converted into tax credits in line with Article 39(2) of the CRR. This special scheme is applicable 
to DTAs that result from the non-deductibility for corporation tax purposes of expenses and 
negative equity changes arising from losses from credit impairments and from post-employment 
and long-term employee benefits5.   
1.3 According to the draft law, a credit institution  may decide within a given time to opt into the 
schemes6. If a credit institution decides to take part in  the scheme, the credit institution must create 
a special reserve in the amount of 110% of the tax credit whenever one is granted which will be 
subject to the same legal framework as mandatory legal reserves7. The establishment of the special 
reserve also involves the simultaneous creation of rights to equity, which are allocated to the State for no consideration
8. These rights to equity are negotiable securities that grant their holder the 
right to require the credit institution to convert th e special reserve into share capital, and where 
applicable, the share premium account, by issuing ordinary shares. The State can exercise the conversion right attaching to the securities at its discretion
9. As the shareholders of the credit 
institution have a call option on the rights to equ ity, the State can sell the securities back to those 
shareholders and subseque ntly sell any securities not bought by the shareholders to third parties. 
These third parties can exercise the conversion right and become shareholders of the institution. 
1.4 Furthermore, the draft law aims to ensure that Portuguese credit institutions can operate on a level 
playing field in Europe, in view of the fact that  several other Member States have also introduced 
similar schemes concerning DTAs. 
 2. General observations  
2.1 The draft law makes use of the possibility opened up  by Article 39(2) of the CRR to provide for the 
non-deduction of certain kinds of DTAs from regu latory capital. The ECB understands that the 
DTA/tax credit scheme set out in the draft law is of a voluntary nature and applies only to credit 
institutions that decide to join the scheme. 
2.2  As noted in paragraph 1.2 above, the draft law seeks to address the potent ial negative implications 
for the regulatory capital of credit institutions ar ising from the deduction of DTAs from that capital. 
The ECB takes note of the expected positive impact of the draft law on the regulatory capital of the 
Portuguese banking sector.  
2.3 The ECB recommends that the Portuguese authoritie s carefully assess the implications of the draft 
law from the perspective of fiscal debt and sovereign debt sustainab ility, and that they also take 
into account the need to break the link between the banking sector and sovereign debt. The 
                                                            
5  Article 1 of the Annex to the draft law. 
6  Article 3(1) of the draft law and Article 2 of the Annex to the draft law. 
7  Articles 3(3), 6 and 8 of the Annex to the draft law. 
8  Article 9 of the Annex to the draft law. 
9  Article 10 of the Annex to the draft law. 
ECB-PUBLIC  
3 conversion of DTAs into tax credits might reduce the incentive and/or the regulatory need for 
shareholders to inject fresh capital into cred it institutions. Furthermore, compared with the 
recapitalisation of the banking se ctor with cash provided by private investors, the DTA/tax credit 
scheme might create an additional debt burden for th e State, irrespective of the statistical treatment 
of the scheme; it might strengthen the adverse li nk between the sovereign debt and participating 
credit institutions and be less favourable in comp arative terms from a bank liquidity perspective. 
These potential risks may be exacerbated in countries with a high level of sovereign debt, and thus 
may contribute to financial fragmentation within the euro area. 
 3. Special reserve 
3.1 The draft law introduces new provisions in additi on to the application of Article 39(2) of the CRR, 
namely requirements that institutions participating in the scheme: (1) establish a special reserve in 
the amount of the tax credit granted plus 10 per cent; and (2) provide for the simultaneous creation 
of rights to equity to be allocated to the Po rtuguese State. The ECB understands that these 
additional requirements are designed to protect the State against the fiscal risks associated with the 
conversion of DTAs into tax credits described in paragraph 2.3.  
3.2 The structure of the scheme is a matter for th e Portuguese authorities to determine. The negative 
impact on the debt sustainability of the soverei gn may well be mitigated if the State receives an 
equity stake in a participating credit institution in  exchange for granting tax credits. Nevertheless, 
such a capital increase subscribed by the State  will remain less preferable  compared to a capital 
increase subscribed by private investors. The scheme may result in significant involvement by the State in the ownership of a credit institution if th e tax credits granted are la rge relative to the total 
common equity of the credit institution, although the ECB understands that such risks might be 
mitigated by the State being able to sell the securities not only to shareholders but also to third parties, as noted in paragraph 1.3 above. Extens ive state involvement in bank ownership is not 
advisable, not least because of the need to break the link between sovereigns and banks. In 
addition, potential significant involvement by the State in the ownership of a credit institution may 
run counter to the principle of ensuring recapitalisation via private investment into credit institutions.  
 
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4 4.  Statistical treatment 
The ECB understands that Eurostat will provide its views on the statistical treatment of the 
conversion of DTAs into tax credits under the scheme in due course.   
 
This opinion will be published on the ECB’s website.  
 
Done at Frankfurt am Main, 3 September 2014. 
 
[signed] 
 
The President of the ECB 
Mario DRAGHI