The Spanish Supreme Court accepts the tax deduction of employment income derived by a major shareholder

In two recent judgements, the Spanish Supreme Court (SC) accepts the tax deduction of employment income derived by a major shareholder that is not the company’s director.

The SC brings a new approach to the criterion formerly applied by the Spanish Tax Agency (STA) which had considered that such payments would not be tax deductible as they should be considered as a liberality, and not a mandatory expense.

✔ The STA lines of attack have been mainly based on the fact that the major shareholder has a controlling position in the Company. Therefore, it cannot be considered that the individual is rendering services under an employment relationship to give the fruits and/or efforts deriving from the employment relationship to the Company.

✔ The SC criticises that the STA focuses its challenge on the control position without taking into account that there are two different legal personalities: the shareholder and the Company.

✔ For the SC, if the remuneration is made only for the shareholder’s position, it is clear that it would be non-tax deductible. However, in order to determine whether a payment is tax deductible, it is necessary to focus on the reality of the services provided and on the relationship between such services and the entrepreneurial activity, and not only on the legal assessment of the expense. Besides, it is also necessary to reflect the expense in the Company’s bookkeeping in the fiscal year of accrual and be duly justified.

✔ The SC also reminds that some resolutions from the General Directorate of Taxes issued in 2021 have also accepted the tax deduction of the major shareholders’ remuneration on the basis that they comply with labour and commercial Law requirements, they are reflected in the Company’s accounts in the fiscal year of their accrual and have documentary evidence.

✔ The SC conclusions are based on the effectiveness of the service rendered, while the Court reminds that the interpretation of the tax law has to be especially cautious when determining the tax deduction of an expense as no room is left for interpretations that force the legal assessment of facts, as the STA did.