Problems of the deductibility of remuneration to administrators.

As we have commented on other occasions, the deductibility in the Corporation Tax (“IS”) of the remuneration of the administrators is subject to a series of complex interpretations and formalities that, if they are minimally not complied with, can cause the Tax Administration to consider as non-deductible in the IS the remuneration paid by a company to its administrator or administrators.

In the article published by Marc Ciutat, partner of the Tax Department of addwill, in the magazine Món Jurídic, which you can find here, the problems of companies in terms of strictly complying with all the commercial requirements concerning that remuneration, and the disastrous fiscal consequences that this could entail for the companies, were addressed in detail.

Contrary interpretation of the Tax Administration.

As explained in the aforementioned article, despite the fact that Law 27/2014 of the IS (“LIS”) includes a specific mention in article 15.e) in relation to the remuneration of directors, establishing that they will not be considered as donations or liberalities “remuneration to administrators for the performance of senior management functions, or other functions derived from a labor contract with the entity”, the Tax Administration continues to deny the deductibility of that remuneration, when they do not strictly comply with commercial regulations, by application of article 15 e) LIS, on the basis that tax regulations do not allow the deduction of expenses that violate the legal system.

Judgment 15/2021 of the Supreme Court pointed out the criterion to defend the deductibility of remuneration to administrators in any case.

Marc Ciutat explained in the article of Món Jurídic that a Supreme Court Judgment of the year 2021 emerged as a ray of hope to combat the aforementioned interpretation of the Tax Administration, which in most cases causes, in our opinion, situations very unfair on taxpayers

In this Judgment, the Supreme Court, analyzing the deductibility in the IS of late payment interest, concludes that the expression “actions contrary to the legal system” established in article 15 e) LIS cannot be used to deny the deductibility of any expense that does not comply any precept of the legal system, but refers to actions that really imply serious breaches of the legal framework, giving as an example the expenses derived from a bribe or similar conduct.

Based on this Judgment, the author concluded that the statement made by the Supreme Court regarding default interest should be applicable to the situation exposed regarding the remuneration of directors and, therefore, we could be seeing the light at the end of the tunnel to correct this unjust situation.

Judgment 558/2022 of the National High Court applies the criterion of the Supreme Court to the remuneration of administrators.

Therefore, that ray of hope seems to have crystallized in the recent Judgment of the National High Court where the same interpretive criterion of article 15 e) of the LIS is applied, in the sense that the expression “actions contrary to the legal system” cannot be used to deny the deductibility of any expense that fails to comply with any precept of the legal system.

The National High Court considers that when a certain social agreement, which is not contrary to public order, has not been challenged within the legal term authorized for this purpose (one year), this agreement will be validated or corrected when the challenge action expires (as provided in Articles 204 and 205 of the Capital Companies Law approved by RDL 1/2010).

In this regard, the National Court refers to the jurisprudence of the Supreme Court to clarify that the concept of “contrary to public order” must be applied restrictively “and not all agreements that are contrary to a mandatory prohibitive legal norm can be classified as contrary to public order“, which leads to affirm that this concept “should be reserved for cases in which the adoption of the agreement would have entailed a violation of rights recognized in the Constitution that are projected in the corporate sphere; the cases in which the agreements constitute an offence, and those that contradict the essential and shaping principles of corporate law, which does not occur in the case of autos”

As a consequence of this, the National High Court concludes that, if we are not facing an agreement contrary to public order, “its possible illegality would be validated or corrected, so it must be understood that we are facing a deductible expense”, since we would no longer be facing a “acting contrary to the legal system”.

The forcefulness of this Judgment against the interpretation that the Tax Administration has been carrying out, makes us optimistic regarding the potential appeals that may be brought before administrative actions that deny the deductibility of remuneration to administrators for merely formal reasons or for pure non-compliance of the commercial requirements that, as in most cases, have not been detrimental to the partners or imply a serious breach of legal regulations.

And it is that even though this sentence is referring to a case in which there is an express agreement regarding the remuneration of the administrators, we understand that nothing prevents its argument from being equally applicable to those cases, the majority, in which the remuneration of the administrators is tacitly approved in the approval agreement of the Annual Accounts.

As always from addwill, we are at your disposal to advise you if you find yourself in a situation in which the Tax Administration is denying the tax deductibility of the remuneration that has been paid to the administrators, and in any case to expand the information regarding this topic. You can leave your query by clicking here.