Directors’ remuneration
In its judgment of 7 February 2025, Spain’s Supreme Court set out clear criteria on the tax deductibility of remuneration received by company directors. The decision reinforces the view that, beyond formal provisions in the articles of association, what matters is whether the payments are real and justified.
Background
In the case examined, the company’s articles of association did not provide for remuneration of the members of the board of directors. Even so, the company had paid certain amounts to three of its senior managers who also acted as directors. The Tax Agency, relying on the absence of a provision in the articles and applying the “dual relationship” theory (under which the senior management employment relationship is absorbed by the directorship), treated these payments as non-deductible gifts.
The Supreme Court’s decision
The Supreme Court rejected this interpretation, stressing that the lack of a provision in the articles does not automatically mean that the payments are non-deductible gifts. According to the ruling, the decisive factor is whether the expenses meet the general deductibility criteria:
- Services actually provided: payments must correspond to functions actually performed.
- Proper accounting: expenses must be duly recorded in the company’s accounts.
- Link with income: there must be a direct relationship between the expense and the generation of income.
Once these points are proven, the remuneration is no longer considered gratuitous and may therefore be tax-deductible.
Practical implications for companies
This ruling has several consequences for companies:
- Flexibility in remuneration: the articles of association do not need to specify directors’ remuneration for these payments to be deductible.
- Need for documentation: it is essential to keep detailed records showing that the services were actually provided and how they relate to the income obtained.
- Attention to formalities: although not strictly necessary for deductibility, complying with legal and statutory formalities can avoid disputes or adverse interpretations by the tax authorities.
In short, the Supreme Court’s ruling reinforces the idea that the deductibility of directors’ remuneration depends on its reality and economic justification, beyond the formal provisions of the articles of association. Companies should ensure that these payments are properly documented and linked to their business activity to secure their tax deductibility.