For some time, tax inspectors have been focused on questioning the tax deductibility of compensation to directors. Based on several rulings from the Economical Administrative court, it is again questioned whether compensations are deductible, especially on cases where such compensation is not compliant to a company’s articles of association. Nonetheless, claims from companies to directors requesting a refund have very little chances of succeeding based on the Supreme Court’s precedents.
The reasons by which such deductibility is usually rejected is because it is classified by the Tax Authorities as a “handout” if the inspection corresponds to a tax year previous than 2015. When the tax year being inspected is after 2015, these are considered to be in breach of law.
Both scenarios have in common that these expenses are not deductible as they are either non-compliant or against the articles of association, yet this does not mean that the director must return its compensation.
Tax inspector usually accepts the above as deductible when compensation has been approved yearly by the shareholders, however, it used to only accept these expenses when compensation could clearly be quantified in the articles of association. Recent rulings that inspectors have started applying do admit these expenses as long as the way of calculating compensation is clear, i.e. fixed amount or certain percentage on profit.
Recent case law from the Supreme Court has addressed all compensation scenarios and highlighted that the purpose of Spanish corporate law forcing to lay out compensation systems in the articles of association is to facilitate as much information to the shareholders as possible. This would result in disregarding requests from companies to their own directors to refund their compensations or indemnities when shareholders have been aware of that over a certain period of time. It must be also taken into account that these cases may have a different outcome when what is being discussed is and indemnity as a severance package or compensation for actual managing the company’s day-to-day business.