Author: Sandra Sariego, tax team leader

The tax deductibility of directors´ remuneration is a topic that everyone has been talking for years. The multidisciplinary nature of the matter which cannot be understood if it is not analysed from a triple commercial, labour and tax perspective, and the fact that both Administration and the Courts have pronounced on this matter (and not always following the same criteria) and having important legislative changes, make this a complex issue.

In this note we will comment on the latest pronouncements on the subject, but not before recalling the origin of the conflict. The fact that according to the doctrine of the High Court, in cases where there is a convergence between the commercial relationship of a director and a senior management labour relationship; the first one should prevail over the second; therefore, any remuneration obtained by the directors, regardless of its origin, must be understood as being paid because of their status as directors. This, linked to the tax issue, means that for the directors’ remuneration to be considered as a tax-deductible expense for corporate income tax purposes, it must comply with a series of requirements set forth in commercial legislation.

What usually occurs? That on many occasions these requirements are not fulfilled in detail and the Tax Administration has been denying its deductibility because it considers the expense as a donation or as an expense contrary to the legal system.

In any case, since 2021, the Courts have been making their position more flexible. The National High Court and the Supreme Court have been rejecting (although for specific cases) both that the Administration may use by default the expression ¨contrary to the legal system¨ to deny tax deductibility, and that all business requirements must be scrupulously followed. Further evidence of this flexibility is the recent Supreme Court ruling of 27 June 2023 in which the High Court held that the tax deductibility of the directors´ remuneration cannot be rejected based on the concepts of donation and expense contrary to the legal system if the remuneration is correctly accounted for and the services provided are not disputed. In our opinion, this is a further step towards guaranteeing that directors´ remuneration can be considered deductible even if it does not meet all the commercial requirements, provided that they respond to a reality that can be proven.

In any case, in order to have the corresponding legal certainty, it will be necessary to wait for new pronouncements, which will in fact, extend the arguments used by the Courts for the rest of the cases.