B Law & Tax
18 July 2023

Tax Advisor: Compensations granted to directors in Corporate Income Tax cannot be considered as acts of generosity and the theory of the link does not apply to them

In a ruling, the Supreme Court rejects the debate on the deductibility of compensation to directors based on concepts such as liberality and expenses contrary to the legal system, as long as such compensation is duly registered and the rendering of services is not in question. In addition, the court emphasizes its rejection of the abuse of formality, especially in cases where the employing entity has only one partner. Finally, the tax effects of the link theory are ruled out according to the doctrine of the Court of Justice of the European Union (CJEU).

For years, the tax administration has debated the deductibility of compensation to directors and administrators, due to the non-compliance with formal requirements established by the commercial regulations. It has been argued that these expenses are a liberality or contrary to the legal system. This perspective has affected all the remuneration of such directors and administrators, including those derived from their executive functions. The theory of the link has been applied when it is considered that the employment relationship is absorbed by the commercial relationship, especially in the case of directors or administrators of high level or with executive functions.

In this specific case, the Supreme Court has ruled in favor of the deductibility of this type of compensation, under the following conditions: the compensation was granted to employees who had a senior management relationship and who had also been appointed as directors of the company. The Inspection determined that the linkage theory was applicable in this case. Despite the fact that the compensation was supported by evidence, duly accounted for and set forth in the Articles of Association, it was argued that since it had not been approved by the general shareholders’ meeting (even though the entity had only one partner and the veracity of the services was not in question), the compensation was not deductible, including those compensations that remunerated executive functions.

In a judgment issued on June 27, 2023, the Supreme Court establishes the following case law, applicable according to the commercial and tax legislation governing the case (specifically Article 14.1. e) of the Consolidated Text of the Corporate Income Tax Law: compensation received by the directors of a commercial entity, which is duly registered, supported and contemplated in the company’s bylaws, should not be considered a non-deductible liberality (according to article 14.1.e) of the TRLIS), even if it has not been approved by the general meeting. Provided that the bylaws clearly indicate the manner and amount of such compensation.

In the case of a company with a sole shareholder, it is not necessary to comply with the requirement of approval of the compensation to the directors at the general meeting, since in sole proprietorships, the sole shareholder exercises the powers of the general meeting (according to Article 15 of the Consolidated Text of the Capital Companies Act). Even if this requirement established by the commercial law were to be considered as enforceable in cases subsequent to those analyzed, its non-compliance should not automatically lead to considering the corresponding expense as a liberality and to deny its deductibility.

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