The controversy on the tax deduction of Directors fees is back

In a recent resolution of 17 July 2020, the Spanish Central Court (TEAC) has retaken again the issue about the tax deduction of Directors fees. In its resolution, the TEAC has resolved that, if the formalities required in the Commercial Law regulations are not complied with, the expense is not tax deductible, for Corporation tax purposes, as it is contrary to the legal system.

In this way, the TEAC equalises the non – compliance of the Commercial Law condition on the required statutory prevision of the Directors fees to situations such as bribes, which are against the legal system and, therefore, penalised.

✔ We remind you that the tax deduction of Directors fees had generated controversy due to a Supreme Court judgment of 13 November 2008 that established a strict compliance of the Commercial Law, in order to consider the expense as tax deductible, for Corporation tax purposes. Such judgment was based on the understanding that there is only a single relationship between the individual and the company, as it considered that senior management who, at the same time, are the company’s Directors have a mercantile and not a labor relationship with the company.

✔ Spanish Corporation tax Law tried to settle such controversy and it incorporated a new provision according to which Directors fees would not qualify as a liberality when they were due to accomplishing senior management functions or to a labour contract with the company.

✔ From a Commercial Law point of view, the Director’s position is for free. If a remuneration is agreed, it must be included in the by – laws. On the basis that the Spanish Corporation tax Law expressly establishes the tax deduction of expenses due to senior management functions, it would be reasonable to think that the absence of such statutory prevision would only be a formal irregularity with no impact in the Corporation tax.

✔ Far from this rationale, the TEAC, in its resolution, is of the opinion that contravening the formal Commercial Law requirements on the statutory prevision of the remuneration is a substantial irregularity that causes the non – deductibility of the expense. Besides, the TEAC foregoes the Spanish General Directorate of Taxes criterion (CV 1788 – 17, of 10 July) that considered against the legal system those actions whose performance is punished by the legal systems, such as it is the case of bribery.