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Miriam Sánchez González.  

Companies can deduct the director’s remuneration as an expense even if the position is free of charge. New twist of the Supreme Court

The Supreme Court, in its ruling of March 13, 2024, again ruled on whether the remuneration of directors is deductible for corporate income tax purposes, particularly when the company’s bylaws do not explicitly provide that the position is remunerated.  

What is the Tax Agency’s opinion on the matter?

The Tax Administration has been automatically denying companies the deduction of the expense for the remuneration of the administrators when the bylaws do not establish that the position is remunerated.  

Until now, if the bylaws did not establish a formula for remuneration of the position of director for the performance of his duties, the Tax Administration considered that the position was free of charge and, therefore, any payment received by the directors was considered a liberality for the mercantile companies.

This being so, and being considered as a “liberality”, this would be a non-deductible expense for the company, as established in Article 14.1 e) of the Consolidated Text of the Corporate Income Tax Law.

That is to say, for the Tax Administration, if the position of director does not have a remuneration fixed in the Bylaws, the expense would not be fiscally deductible in the Corporate Income Tax.

What does the Supreme Court now say about this lack of deductibility?

Well, the Supreme Court, quite rightly rules on this issue, providing clarity and guidance on an issue that has been the subject of much controversy, by establishing that the deduction of expenses for the remuneration of directors cannot be denied simply because the bylaws do not establish their remuneration.

In the case in question, the directors also had senior management contracts with the company, being subject to a commercial relationship with the company, according to the theory of the double bond. This theory establishes that the mercantile relationship prevails over the labor relationship, which classified them as directors when it came to receiving their remuneration. This being so, and the bylaws not establishing any remuneration for their position, their remuneration was considered non-deductible for corporate income tax purposes as it was treated as a liberality.

The Supreme Court denies this approach on two grounds: 

The first of these is that, according to previous case law, a duly accounted and accredited expense that rewards services actually rendered cannot be understood within the concept of gratuitousness.

The second is that a possible non-compliance with commercial regulations cannot convert an onerous service into a gratuitous one. This conclusion is based on the principle of correlation of income and expenses. This being so, the companies will be able to demonstrate the correlation of these remunerations with the business activity and the obtaining of income, as well as the reality of the services rendered by their administrators.

In addition, and very important, the fact that the ruling offers the opportunity to those companies that previously did not consider these remunerations deductible due to the gratuitousness of the position in the bylaws, to initiate proceedings to recover the excess taxation they have borne.

Thanks to this ruling of the Supreme Court, legal certainty and clarity is provided as regards the interpretation and application of the tax regulations in relation to the deduction of the directors’ remuneration in the Corporate Income Tax, allowing the deductibility of the expense even when the position of director was free of charge in the bylaws.

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