TEAC's new perspective on senior management compensation

Impact of the link theory on compensation.

he Central Economic-Administrative Court (Resolution 2059/2020 of 18/12/2023) has modified its criteria in relation to the labour and commercial relationship of the members of the boards of directors and administrators of companies. 

According to the consolidated case law of the Court of Justice of the European Union (CJEU), the employment relationship is not affected by the existence of a commercial relationship, nor can the rights and protections that correspond to workers be denied, nor can their employer companies. This jurisprudence implies that, even if a commercial relationship exists, the remunerations paid to a worker cannot be denied nor can they be made less favourable to the worker or his company if these remunerations are duly documented and correlated with the income. 

From the employee's perspective, if both an employment relationship and a business relationship concur, the existence of a special senior management employment relationship would determine the possible application of the personal income tax (IRPF) exemption to the senior manager's severance pay. If the employee had a common or ordinary employment relationship prior to the special senior management employment relationship, it must be determined when the latter began and what portion of the severance payment is exempt from Personal Income Tax (IRPF). 

Therefore, the TEAC has modified its previous criterion, which denied that the business relationship absorbed the special senior management employment relationship, recognizing now that the mere existence of the business relationship is not sufficient to disregard the senior management employment relationship and the possible tax exemptions that may apply to the indemnities received.