Explore the National Court's in-depth analysis of director remuneration and its legal and tax implications
The National Court, in a judgment of October 3rd, 2022, appeal number 541/2019, analyses the effects of the link theory, and rejects the rigorous interpretation of the mandatory requirement of inclusion in the Bylaws of the company of the remuneration of the board of directors and/or administrators.
The Spanish Tax Office (hereinafter, “AEAT”) has been denying the deductibility of the remuneration of directors who are also executive directors or senior managers in cases in which, on the basis that the commercial link of the director absorbs the functions that can be developed as senior management, it considers that the commercial requirements relating to the remuneration of directors are not met. That is to say, the mercantile normative rigor is applied to allow the deductibility of the remuneration in the tax field.
In this case, the AEAT holds the same position, arguing that the remuneration expense in itself is a non-deductible liberality, insofar as, according to the bylaws, the position of the administrator was remunerated, but not going into a rigorous detail on the form of such remuneration, and it was not accredited that they performed functions beyond those authorized for the members of the board of directors. The National Court recalls that this is an issue subject to clarification by the Supreme Court and rejects this position of the AEAT.
Firstly, it indicates that in the so-called doctrine of the link, the compatibility of the labor relationship of senior management, with the mercantile relationship of the position of director must be taken into account, when the functions performed by reason of the former are different from those carried out by reason of the latter, relying on two rulings of the National Court itself (SSAN of February 17, 2022 and March 29, 2022) as well as the Judgment of the Court of Justice of the European Union of May 5, 2022, case C-101/21.
Secondly, the arguments of the National Court are based on the finalist interpretation that the jurisprudence of the First Chamber of the Supreme Court has attributed to the requirement to include the directors' remuneration system in the bylaws. The purpose of this statutory requirement is to provide the maximum information to the shareholders in order to enable their control. Based on this, the Court considers that the singular character of this case lies in the fact that the remunerations were correctly informed to the shareholders in an Extraordinary General Meeting, complying with this finalist interpretation, with the aim of concluding that conditioning the deductibility of the expense to its statutory coverage could fall under the umbrella of a formality abuse.
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