New Case Law on the Deductibility of Directors’ Remuneration

Published on 9 April 2024

The tax deductibility of the remuneration of directors and executives has been questioned by the Spanish tax authorities in those case where such remuneration does not comply with the statutory requirements under applicable company law. In particular, when the remuneration is paid to senior executives who are also members of the company’s board of directors.

Regarding this question of deductibility, the Spanish Supreme Court (Tribunal Supremo) has handed down a ruling on 18 January 2024. The case under review concerned directors’ remuneration which, although provided for in the articles of association, had not been approved by the general shareholders’ meeting. Accordingly, the question arose as to whether this remuneration should be considered a non-deductible gratuitous benefit (liberalidad) under article 14.1.e) of the Spanish Corporate Income Tax Law (TRLIS).

The Spanish Supreme Court established that the said article 14.1 e) TRLIS must be interpreted in the sense that documented and recorded expenses are not deductible when they constitute donations or gratuitous benefits. If they have been incurred as gratuitous benefits for reasons of public relations with customers or suppliers, in respect of the company’s personnel or to promote the sale of goods and services, they are deductible, as long as they are related to the business activity and aimed at improving the business results of the company.

Consequently, the Spanish Supreme Court found that the deductibility of remuneration paid to directors for corporate income tax purposes hinges on two conditions: firstly the payments are real and true, recorded and related to the company’s business activities and secondly the remuneration is provided for in the articles of association and has been approved by the general shareholders’ meeting, even if the corresponding resolution has not been formally recorded with the Mercantile Register.

Therefore, it is highly advisable that companies paying remuneration to their directors or executives have such remunerations formally approved by the general shareholder’s meeting, so that this expense is deductible for corporate income tax purposes.