Opinion of the European Central Bank of 3 September 2014 on deferred tax assets (CON/2014/66)
Date: 2014-09-03
Institutions: European Central Bank
Subjects: Portugal, banking supervision, corporation tax, credit institution, financial stability, national law, share capital

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 
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 

the  European  Union  and  on 

the  sixth 

materially  influence  the  stability  of  financial  institutions  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  575/20132 (hereinafter the ‘CRR’),  since  1  January 2014  DTAs 

that  rely  on  the  future  profitability  of  credit  institutions  to  be  realised  are  to  be  progressively 

deducted from the calculation of their Common Equity 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  under  certain  conditions  DTAs  arising  from 

temporary differences are not considered to rely on future profitability. Such DTAs do not require 

to  be  deducted  from  a  credit  institution’s  regulatory  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  DTAs  from  that  capital;  for  this 

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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). 
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). 
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. 
The scope of this Opinion is restricted to the aspects of the draft decree-law that relate to credit institutions. 

 
 
 
 
                                                            
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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  consideration8.  These  rights  to  equity  are  negotiable  securities  that  grant  their  holder  the 

right  to  require  the  credit  institution  to  convert  the  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  discretion9.  As  the  shareholders  of  the  credit 

institution have a call option on the rights to equity, the State can sell the securities back to those 

shareholders  and  subsequently  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  regulatory  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 potential negative implications 

for the regulatory capital of credit institutions arising 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 authorities carefully assess the implications of the draft 

law  from  the  perspective  of  fiscal  debt  and  sovereign  debt  sustainability,  and  that  they  also  take 

into  account  the  need  to  break  the  link  between  the  banking  sector  and  sovereign  debt.  The 

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Article 1 of the Annex to the draft law. 
Article 3(1) of the draft law and Article 2 of the Annex to the draft law. 
Articles 3(3), 6 and 8 of the Annex to the draft law. 
Article 9 of the Annex to the draft law. 
Article 10 of the Annex to the draft law. 

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conversion  of  DTAs  into  tax  credits  might  reduce  the  incentive  and/or  the  regulatory  need  for 

shareholders  to  inject  fresh  capital  into  credit  institutions.  Furthermore,  compared  with  the 

recapitalisation of the banking sector with cash provided by private investors, the DTA/tax credit 

scheme might create an additional debt burden for the State, irrespective of the statistical treatment 

of  the  scheme;  it  might  strengthen  the  adverse  link  between  the  sovereign  debt  and  participating 

credit  institutions  and  be  less  favourable  in  comparative  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 addition 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  Portuguese  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 the Portuguese authorities to determine. The  negative 

impact  on  the  debt  sustainability  of  the  sovereign  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 the tax credits granted are large 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.  Extensive  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.  

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 

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