The National High Court has recently issued a ruling (Ruling 368/2023 of 11 January) that relaxes the conditions for companies to deduct the salary of their directors and administrators as a corporate tax expense.
The milimetre doctrine
Until now, the tax authorities often prevented the deduction of such salaries for various reasons, the most frequent being that the exact remuneration was not detailed in the company’s articles of association.
This was known as the «millimetre doctrine», which strictly required two conditions for companies to be able to deduct the costs of directors’ and managers’ remuneration:
- That the bylaws expressly provide for the possibility of these positions being remunerated.
- The exact amount of these salaries should be specified in the Articles of Association.
If these requirements were not met, the Administration understood that the amounts paid were not obligatory and therefore could not be deductible. However, this condition left out many companies. Because directors and board members occupy key positions and their remuneration often varies according to many variables, such as corporate performance.
It is no longer necessary to include the exact amount of such remuneration in the company’s articles of association
This is a legal disquisition that has been going on for a long time. In the past, the Supreme Court had already ruled that what is important is to demonstrate the reality of the service rendered, its effective remuneration and its correlation with the business activity. Now the Audiencia Nacional has ratified this position and has also expressly added that it is not necessary to include the exact amounts of the salary in the articles of association in order to consider it as a deductible expense.
It is sufficient to set a salary ceiling for the salary to be deductible
In the latter judgment of the Audiencia Nacional, the remunerated nature of the position was indeed stated in the articles of association. However, they did not specify the exact amount of the remuneration. It was limited to establishing that the remuneration of the directors would be determined at the general meeting and that the amount could never exceed 10% of the net profits of each financial year.
This practice of setting a percentage of profits as a limit is common in many companies. Now the Audiencia Nacional has interpreted the applicable commercial law in a more flexible manner to conclude that the Administration is applying an excessively rigid interpretation and that it is not necessary for the articles of association to specify a specific amount or a specific percentage. It is valid for the articles of association simply to set a maximum limit for the general meeting. Because in the end this greater flexibility benefits the shareholder.
What are the new conditions for deducting directors’ and administrators’ salaries as a corporate tax expense
What are the new conditions for deducting directors’ and administrators’ salaries as a corporate tax expense
Following this latest ruling by the Audiencia Nacional, the conditions for a company to be able to deduct the salary of directors and administrators from its corporate income tax are considerably more flexible. Two minimum requirements are sufficient:
- That the Board of Directors, which is the highest body of a Society, has not challenged this salary and decided that the member in question cannot receive it.
- That this salary has been correctly recorded in the accounts and can be supported by documents such as a bank statement.
In any case, it is advisable to carry out an individual analysis of each specific case in order to be able to assess the tax consequences. Although the courts are becoming increasingly flexible, it will be necessary to keep an eye on the evolution of their criteria.