Board of directors: personal income tax exemption on income earned abroad
AUTHOR: Francisco Javier Rodríguez. Tax Manager
Bové Montero y Asociados
In light of the National High Court pronouncing in favour of the taxpayer, and while we await the Supreme Court’s judgment, it may be premature to rule out the possibility of directors enjoying the exemption on income earned abroad.
The Spanish Personal Income Tax (PIT) Act establishes an exemption of up to 60.100 euros on income earned from personal services performed abroad where the beneficial owner is a non-resident entity, or a fixed establishment based abroad, with the additional provision that the service is subject to a tax of a similar or analogous nature to Spanish PIT in the foreign country.
According to the literal wording of the law, any taxpayer earning income from personal services could theoretically claim this form of relief. However, the Spanish Tax Agency has traditionally refused to grant it to those taxpayers who, having earned income abroad, also hold the position of company director.
In their refusal to allow company directors to enjoy the exemption, both the Tax Agency and the General Directorate of Taxes have cited the fact that, as they do not have employment contracts with the company, there is no dependent employment relationship, which is required for the relief to apply.
At this point, it is worth noting that, although there is no employment relationship between a company and its directors, but rather a business relationship, for PIT purposes, both of these types of income are regarded as personal services income. According to the literal wording of the law, there therefore exists a theoretical right to claim tax relief on income earned abroad in both cases.
The National High Court judgment of 19 February 2020 (appeal 485/2017), on the application of the exemption on income earned abroad, ruled in favour of the taxpayer, stating that, although interpretation of tax exemptions and relief should generally be restrictive, under no circumstances is it permissible to enforce requirements which are not expressly provided in law.
Using the above argument, the National High Court judgment concluded that persons earning income abroad could not be refused the right to the exemption merely because they hold the position of company director. On the other hand, it also mentioned that for the right to apply, all other legal requirements must be fulfilled, including the need for the beneficial owner of the services to be a non-resident entity.
When contemplating the possible effects of the National High Court judgment, it should be noted that the Supreme Court granted permission to appeal regarding the same question on 21 February 2020, so we must wait to see what precedent it sets in its answer.
In conclusion, in light of the National High Court judgment, it may be premature to rule out the possibility of taxpayers who are company directors enjoying the exemption on income earned abroad.
Particular attention should be paid to the position taken by the Supreme Court, which, as previously mentioned, is currently considering a case on appeal regarding the same question (order of 21 February 2020, appeal 5596/2019).
Depending on the Supreme Court judgment, it may even be possible to amend PIT returns filed by company directors for prior tax reporting periods for which the limitation period has not yet expired. In this way, they could request a refund of tax paid on income earned abroad, with the prior charge then regarded as an error of principle.
With this in mind, the time limit for amendments to 2015 PIT returns expires on 30 June 2020, meaning that any amendment for this period must be filed before that date, regardless of whether the Supreme Court has pronounced judgment.
Read the originak article in “Expansión” aquí.