In its ruling of November 20, 2023, the National Court examines two issues: the deductibility of payments made to administrators and compliance with the principle of full regularization in relation to adjustments for impairment of securities portfolios.
deductibility of payments made to administrators:
The tax inspection did not accept the deductibility of payments to the company’s directors, arguing that they were not detailed in the bylaws and were not activities different from management. However, the court determines that this does not comply with commercial regulations or the bylaws, as the expense was accounted for, justified, and correlated with income, respecting the objectives of protecting the shareholder.
The evidence presented by the plaintiff demonstrated that the directors had additional work functions to those of senior management, although the bylaws did not specify the remuneration. Therefore, the court concludes that the expense cannot be considered a gratuity and must be considered deductible.
Arguments of the Supreme Court in favor of tax deductibility:
The Supreme Court, in a decisive decision, supports the tax deductibility of expenses, arguing the following:
- The Court emphasizes that the non-compliance with commercial requirements cannot justify the Tax Administration considering an expense as a gratuity, as it corresponds to an onerous commercial relationship between the company and the administrator.
- The Court also considers the possible non-compliance with the commercial requirement regarding the approval of the remuneration of administrators at the general meeting. It explains that the regulations applicable in the analyzed exercises —2008, 2009, and 2010— did not require this step, so it could not be demanded. Furthermore, it argues that even if this requirement were applicable, it would not be pertinent in a sole proprietorship, where the sole shareholder replaces the general meeting. In summary, the Court concludes that there is no unprotected shareholder interest, so it would not make sense to require a board agreement in cases where the sole shareholder approves the remuneration of the administrators.
- The Supreme Court warns about the prudent and cautious use of the double link theory in the tax field, considering the circumstances of each particular case.
- The Supreme Court concludes that the double link doctrine should not harm workers who are also administrators, nor should it harm employing companies that deny tax deductibility to them, compared to other workers without a double link.
- The Court indicates that Article 15.1.f) of the Corporate Income Tax Law excludes from deductibility expenses related to illegal conduct, such as bribes, but it does not cover the remuneration of administrators that do not meet commercial requirements.
Tax Deductibility: Caselaw Doctrine
Remuneration paid to administrators of a commercial company, as long as they are recorded, justified, and included in the bylaws of the company, should not be considered as non-deductible expenses, even if they were not approved by the general meeting. This criterion applies especially when the bylaws indicate the form and amount of such remuneration.
In the case of companies with a single shareholder, it is not necessary for the remuneration of administrators to be approved at the general meeting, as this body does not exist in sole proprietorships, and the sole shareholder assumes the functions of the general meeting.
Even if it were considered that this requirement is mandatory according to commercial law, its non-compliance does not necessarily imply that the corresponding expense be considered as a gratuity and not be deductible.
Compliance with the principle of full regularization:
Regarding the second issue raised, the Court maintains that neither the amount nor the origin of the provision for impairment is justified due to lack of access to the entity’s accounting, even if it is supported by an accounting auditor. Additionally, Article 12.3 of the Corporate Income Tax Law is violated, which establishes a legal limit for the provision.
The plaintiff invokes the principle of full tax regularization, arguing that the Tax Agency should have considered the income from the following year that involved the reversal of the provision. This principle, supported by Article 103.1 of the General Tax Law, establishes that the Tax Administration must address all issues raised during the tax application process, both favorable and unfavorable, and may grant a tax credit without the need for a new tax procedure. Therefore, sending the plaintiff to a new procedure for the refund of undue income would be contrary to this principle, which the Tax Administration is obliged to consider in regularization, even if it is not directly related to the audited years.
Therefore, the adjustment made is maintained, and the plaintiff’s right to the refund of income for the unaudited years (2012 to 2016) for the same reason, along with the corresponding late payment interests, is recognized.
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