Cim tax & legal

Final judgment for the vinculum theory: The Supreme Court finally acknowledges the deductibility of the Administrator's remuneration.

Professional articles

Maria Ravetllat | Abogada Senior Associate

After an intense and exhausting battle with the Tax Administration, the Supreme Court has finally confirmed what many of us have been repeating for years: the remuneration paid to administrators is considered a fiscally deductible expense, even when the articles of association provide for the gratuitousness of the position.

Although the entry into force of Law 27/2014, of November 27, on Corporate Income Tax seemed to have given respite to this issue with the express recognition that remunerations to administrators for the performance of their managerial duties are not considered donations or gratuities, it also introduced the concept of "expenses for acts contrary to the legal system," vetoing their fiscal deductibility. With this modification, the tax administration has been interpreting that to the extent that the absence of provision of administrators' remuneration in the articles of association of the company violates commercial regulations, the expenditure for remuneration cannot be deducted.

Indeed, the deductibility of administrators' remuneration for the performance of their duties has, until now, been an easy target for victory against taxpayers, since tax authorities denied its consideration as a fiscally deductible expense when it did not strictly and meticulously comply with commercial regulations for its approval and subsequent regulation. This directly affected all remunerations received by members of the management body, both for the performance of their managerial functions and for the performance of their executive or operational functions within the company, as the Tax Administration had been denying the deductibility of administrators' remuneration for performing managerial functions based on the vinculum theory, according to which when the same individual simultaneously holds an employment relationship and a commercial relationship with the company, the latter absorbs, for all purposes, the former. This criterion, together with the requirement of strict compliance with commercial regulations, practically meant considering all salaries paid by a company to its administrator and, at the same time, manager, as non-deductible. Well, after years of litigation, debate, and countless controversial tax inspections, since June 2023, the Supreme Court has also progressively positioned itself in favor of the taxpayer, recognizing that the historical classification made by the Tax Administration, as a donation or gratuity for all remuneration for the position of administrator based on irregularities of a commercial nature, is excessive.

In the judgment of June 27, 2023, it was shown that, in the case of single-member companies, the requirement of approval of the remuneration to administrators at the General Meeting loses all rationality, since, being a single member, the administrative body becomes nonexistent, and any formality that could be required lacks legal force to protect the minority shareholder who, let us remember, does not exist in this type of company.

Subsequently, on November 2, 2023, the Supreme Court once again pronounced on the matter, invoking its jurisprudential doctrine on the concept of "donation" or "gratuity," the deductibility of which is expressly prohibited by Article 15 of the Corporate Income Tax Law. In this sense, the Supreme Court indicates that when the services provided are real and effective, deriving from a senior management contract and/or a commercial contract, it is inconsistent to classify them as a gratuity, especially when it is evident that there is no animus donandi to support such consideration.

Likewise, the Court also points out that the Administration cannot shelter under the concept of "actions contrary to the legal system," since this consideration is expressly reserved for those actions manifestly rejected by the legal system. Under no circumstances should it be forgotten that, as the Supreme Court has reiterated on multiple occasions, the consideration of an expense contrary to the legal system is solely and exclusively reserved for those actions that constitute a manifest breach of the legal system. In other words, it is not a catch-all where any circumstance or expense whose deductibility could be questioned due to its origin or nature can be placed, but solely and exclusively for those cases where the nature of the expense arises from a context of blatant illegality that could imply its classification in criminal terms. Therefore, if the illegality defended by the Administration were so evident, would there not be a judgment in the criminal field that would qualify it as such?

Finally, the novelty now arises with the latest resolution issued by the Supreme Court, by which a case is resolved in which the articles of association expressly established the gratuity of the position of administrator. The Supreme Court argues that the formal non-compliance with commercial regulations does not imply per se the consideration of an expense as a gratuity, since the payment thereof derives from an underlying business relationship with unquestionable onerous cause, especially when they are accounted for, evidenced, and provided for in the articles of association of the company. In its judgment, it concludes that the lack of agreement of the general meeting does not necessarily imply that the remunerations of the administrators constitute a gratuity, so that the absence of statutory provision for the remuneration of administrators cannot in any case imply the denial of a legal and material reality, since the provisions in commercial regulations do not entail a iuris et de iure presumption that transcends to the fiscal sphere. Thus, if it can be demonstrated that the remuneration of the administrators effectively corresponds to the services provided and it is duly accounted for, it could be argued that the gratuitous nature disappears and it must be considered as a deductible expense.

The new judgment of the Supreme Court represents a before and after in the commercial and fiscal treatment of the remuneration of administrators. This does not mean that in all cases where the remuneration of the administrator is not provided for in the articles of association, the remuneration can be deducted, but rather that companies must be able to demonstrate the onerous nature of the remunerations and, of course, the reality of the services and the correlation with the income to ensure the deductibility of the expense.

From now on, the door is open to review the non-deductibility of administrators' remuneration in non-prescribed fiscal years, when the requirements for deductibility are met.

However, according to the Supreme Court in its judgment of April 8, 2024, the same fate does not await the compensation paid by a company to the Chairman of the Board of Directors on the occasion of his resignation from the position. In the case recently analyzed by the Court, it is ruled that the amount paid does not stem from a legal and/or contractual commitment (that is, it was not stipulated in the articles of association or in the director's contract), so it must be classified as a non-deductible donation or gratuity in Corporate Income Tax. Indeed, considering that at the time of negotiating the departure of the high-ranking position, there was no guaranteed amount for its recipient, the right to receive it does not arise from the articles of association, but from a subsequent agreement between both parties, which also lacks correlation with business income, especially since it does not find its cause in a protection or shield clause in terms of exclusivity or non-professional competition.

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Cim tax & legal