B Law & Tax
26 July 2023

Tax Advisor: The Supreme Court allows corporate income tax deductions for the remuneration of directors and sole shareholder, without the need for approval by the general meeting of shareholders

The Supreme Court rules that the remuneration of directors in a commercial entity, ascertained and provided for in the articles of association of the company, is not considered a non-deductible liberality, even if it was not approved by the general meeting of shareholders. In the case of a sole proprietorship, approval by the general meeting is not required because the sole shareholder exercises the powers of such body.

The Supreme Court has established in a consolidated jurisprudence that the relationship of the corporate administrators is of a commercial nature. The denial of the deductibility of remuneration expenses to administrators or workers who are also administrators is based on considering them as donations or liberalities. The contested ruling, following the doctrine of the STS of March 30th, 2021, establishes that the expenses credited and accounted for are not deductible if they constitute donations or gifts, except those corresponding to public relations with clients or suppliers, common practices with the company’s personnel, promotion of sales or services, or direct or indirect improvements to the business result, provided that they are not destined to partners or participants.

The first instance ruling denies the deductibility of the expense, arguing that the acquisition of own shares and the capital reduction are not related to the business activity and are considered to be expenses for donations or gifts according to art. 14.1.e) of the Corporate Tax Act (previous revised text of Corporate Tax Act). The expert report confirms that the transaction benefited the company and generated significant profits in the income statement. However, the debate on whether the transaction benefited certain participants or the company is not relevant to determine the deductibility of the expense, since the animus donandi requirement is not met in this case.

In this appeal, it cannot be discussed whether the expenses with a clear onerous cause could have been exempted as deductible under other sections of art. 14 of the Corporate Tax Act (previous revised text of Corporate Tax Act) that corrects the accounting result, since the Court considers that they are not deductible in the Corporate Tax. Regarding the observance of the mercantile laws with respect to the statutory provision or the approval of the remuneration to the administrators, the Court holds that there is no unprotected or unprotected shareholding interest, so that a collegiate agreement of the meeting is not necessary in cases where the sole shareholder is the one who fixes, approves and knows the remuneration of the workers or administrators both before and after approving the accounts.

The Court rejects the total exclusion of the deduction of directors’ remuneration, even in the case of a sole shareholder. It considers that the remuneration accounted for and provided for in the articles of association must be considered tax deductible, regardless of the approval by the Shareholders’ Meeting. Even admitting the theory of the commercial relationship over the labor relationship, if the remuneration is real, proven, accounted and onerous, it is not considered a non-deductible liberality. The case law of the CJEU supports this approach, avoiding treating employee-managers unfavorably compared to other employees and allowing the deduction of their remuneration. The double link is also legally recognized, which invalidates the exclusivity of the single link as an argument to deny deductibility. Consequently, the disputed remunerations must be considered tax deductible.

According to the case law established by the Supreme Court, the remuneration received by the directors of a commercial entity, accounted for, accredited and provided for in the articles of association of the company, is not considered a non-deductible liberality according to article 14.1.e) of the Corporate Tax Act (previous revised text of Corporate Tax Act). This is valid even if they have not been approved by the general meeting, provided that the bylaws allow the manner and amount of the remuneration to be deducted, as is the case here. In the case of a sole proprietorship, it is not necessary to comply with the requirement of approval of the remuneration at the general meeting, since the sole shareholder exercises the powers of that body according to article 15 of the previous revised text of Capital Companies Act. Even if this requirement were to be considered enforceable in the future, its non-compliance would not automatically imply that the expense is a non-deductible liberality.

B Law & Tax International Tax & Legal Advisors.

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