Spain's National High Court declares directors' remuneration is a deductible expense

The National High Court, in its ruling of 11 January 2023, appeal 548/2019, rejected the reasoning of the millimetre doctrine applied by the Spanish tax authorities, according to which directors' remuneration is as a non-deductible expense.

The National High Court's ruling stated that directors' remuneration can be deducted even if the amount of remuneration is not established "in a specific or determinable manner" in the articles of association and, therefore, rejected the millimetre doctrine applied by the tax authorities.

A case was analysed in which the articles of association established a maximum remuneration of 10% of the net profit and in which the tax authorities required that the articles of association must establish a specific percentage or amount so that the directors' remuneration could be consider as a deductible expense and, therefore, the board had no or a very limited margin of decision.

Remuneration system

The National High Court maintained that the remuneration system must only include the different items of remuneration under which the directors will be compensated and, thus, the specific amount to be received for the performance of their management functions falls out of the scope of the statutory reserve.

It understands that if the articles of association establish a remuneration system and sets a maximum limit, and the shareholders' meeting determines and approve the amount of remuneration to be paid to the directors each year within the 10% limit set out in the articles of association, the system is compliant with the law and the guarantees of the shareholders are not, therefore, undermined.

In its ruling of 21 September 2022, appeal 904/2019, the National High Court had previously shifted away from the formalistic approach applied by the tax authorities as to regard the directors' remuneration as a non-deductible expense, in a case where the articles of association established a different remuneration system depending on whether or not the directors performed executive functions and where no specific amounts were set, but rather referred its approval to the corporate bodies.

Deductible expense

The National High Court stated that the remuneration system set out in the articles of association must provide a set of rules to fix the amount of remuneration; however, the commercial law provides a wide margin of freedom to establish the remuneration system in the articles of association as long as the shareholders' interest is safeguarded. Thus, if the articles of association establish a set of rules to fix the amount of remuneration, such compensation constitutes a deductible expense, even though the amount of remuneration has been determined by the shareholders' meeting or the board of directors.

On the other hand, in addition to shifting away from the "abuse of formality" applied by the tax authorities, which considers the directors' remuneration as a non-deductible expense, the National High Court has even gone so far as to accept that the amount of remuneration is a tax-deductible expense, even when the articles of association does not establish that the position of director will be remunerated.

Osborne Clarke comment

It is clear that the National High Court is positioning itself in favour of taxpayers when, in all these rulings, it accepts directors' remuneration as a tax-deductible expense. However, the conflict with the tax authorities (which applies the restrictive and formalistic approach of the Central Economic Administrative Court, for example, resolution 03156/2019 of 17 July 2020) will foreseeably persist until the issue is definitively resolved by the Supreme Court.