The Supreme Court has dealt a significant blow to the arguments put forth by the review bodies of the Tax Administration had been advocating in the debated issue of the deductibility of administrators’ remunerations.
According to a recent ruling from the Supreme Court, if these remunerations are properly recorded in the accounting and the provision of corresponding services is not in question, then arguments related to gratuity or expenses contrary to legal regulations cannot be used to deny the deductibility of the expense in the Corporate Tax.
Furthermore, the court has reaffirmed its opposition to formalities abuse, especially in situations where the paying entity has a sole shareholder. The tax effects of the linkage theory have also been dismissed, following the doctrine of the Court of Justice of the European Union.
For years, the tax administration has debated the deductibility of fees for directors and administrators, arguing that the formal requirements established in commercial regulations are not fully or partially met. This has affected all payments made to directors and administrators, including those stemming from their executive functions, not just those remunerating their representative and deliberative roles. In certain cases, the linkage theory has been applied when a director or administrator holds a high managerial position or executive functions, leading to the absorption of the labor relationship by the commercial relationship.
In the specific case adjudicated in this judgement, the Supreme Court has ruled in favor of the deductibility of this type of remuneration, taking into account the following factual circumstances:
- The remuneration corresponded to workers with a senior management relationship who had also been appointed as directors of the company.
- Although the remuneration was properly documented and recorded, it had not been approved by the general assembly of shareholders, despite the company having a sole shareholder and no doubts about the reality of the services provided.
Thus, in this judgement dated June 27, 2023, the Supreme Court establishes the following applicable case law under relevant commercial and tax legislation:
- Remuneration received by directors of a corporate entity, which are properly registered, documented, and provided for in the company’s bylaws, do not constitute non-deductible gratuity. This applies even if the relationship between the recipients of the remuneration and the company is of a commercial nature, and these remunerations have not been approved by the general assembly, provided that the bylaws allow for deduction of the form and amount of such remuneration.
- In the case of a company formed by a sole shareholder, compliance with the requirement for approval of director remuneration in the general assembly is not necessary, as this body does not exist for this type of company. In a single-member company, the sole shareholder exercises the powers of the general assembly.
- Although it is accepted that this requirement is mandatory by commercial law, its non-compliance cannot automatically lead to considering this expense as a gratuity and denying its deductibility in Corporate Income Tax.
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