tax deduction of Directors’ fees

The Spanish Tax Authority practice of disallowing the tax deduction of any expense deriving from any action contrary to the Law is known to all, as well as the limitation that it entails concerning the Corporate income tax deduction of the Directors’ fees, even when there is a patrimonial shift in their favor thus being subject in their Personal income tax.

The Spanish National Court, in its Sentence of 16 February 2022, considers that a shareholders’ agreement not complying with the mercantile regulations does not prevent the expense tax deduction when those entitled to take legal action did not exercise it. Let us see what the tax consequences of this new line of argument are.

✔ The Spanish Tax Authority’s position has focused mainly on the fact that the majority shareholder has a controlling position in the company and, therefore, their relationship with the company cannot be considered to be one of an employment relationship.

✔ Since the judgment of 13 November 2008, the Spanish Court has requested strict compliance with the mercantile regulations to consider Directors’ fees as tax deductible:

  • Company’s bylaws: remunerated.
  • Retribution valuation (determined or perfectly determinable).
  • Contract of the Executive Director, approved by the administration body.

✔ The Spanish National Court case analyses if part of the Directors’ fees is tax deductible when it is based on a shareholders’ agreement that could be declared null, as it contains detrimental agreements for the minority shareholders. The Spanish National Court reminds that, based on mercantile regulations, the action to challenge the social agreement expires within the term of one year, except when it contains agreements that are against public order in which case it never expires. The expiration term implies the validation of the nulled agreements. Thus, the Spanish National Court concludes that the Spanish Tax Authority cannot declare the nullity of the agreements substituting the inactivity of the shareholders that could be adversely affected and that did not contest them. Such an agreement has been validated over time and cannot, hence, be considered illegal from the commercial law point of view.

The Secondary Adjustment in Spanish Transfer Pricing Rules

✔ Consequently, thereof, the reasoning of the Spanish Tax Authority by which an expense contrary to commercial regulations cannot be deductible in the application of article 15 f) of Spanish Corporate income tax Law can be attenuated when the agreement is validated due to the expiration of the contesting term, given the inactivity of the legitimated party. Besides, it is worth reminding of the Spanish Court judgment of 8 February 2021 that interpreted what must be considered as an expense contrary to the legal system in the sense that it cannot be compared to any non-accomplishment of the legal system, but it refers only to certain actions clearly opposed to it, bribery or similar conducts, indicating that expansive interpretations must be avoided.


Publicado el 08-2022 por PBS