Spain's Supreme Court rules on tax deductibility of director compensation

Published on 22nd May 2024

The ruling follows the High Court's analysis of compensation paid to directors as tax deductible after their resignation

Statue of justice, Old Bailey court

Spain's Supreme Court has ruled on whether compensation paid to a board of directors' member as a result of their resignation is a non-deductible expense for corporate income tax purposes.

In its ruling of 8 April 2024, the court analysed the possible consideration as a "liberality" – and consequently its status as a non-deductible expense for corporate tax purposes – of the indemnities that may be received by company directors upon resignation or the termination of their position when these are not provided for in the articles of association or in the contractual clauses regulating the relationship.

Prior to the analysis of this controversial issue, the High Court had compiled the content of its latest case law in relation to the deductibility of the remuneration of directors of companies.

The High Court limited the criterion of liberality to payments that are gratuitous in nature, such as donations – unlike what generally occurs in the case of directors' remuneration. It advocated the anti-formalist doctrine in relation to the deductibility of directors' remuneration, even when these do not meet the requirements set by commercial legislation.

After the High Court provided this clarification, the Supreme Court addressed the specific question of whether the compensation that administrators or directors might receive upon their resignation, which is not provided for in the articles of association or in a "golden parachute" clause, should be classified as a non-deductible donation.

In the court's view, the examination of the question at issue involved, first, an analysis of the time, form and conditions under which the compensation was agreed and, second, a determination of the degree of correlation that these payments with the company's financial results and income.

From the analysis of the aspects cited in the case under appeal, confirmed the consideration of the compensation paid as a non-deductible expense.

It held that in this specific case, the payment of these amounts is the result of the agreement reached at the time of the termination and, therefore, in its view, there was no legal basis for making them compulsory and The Surpreme Court also concluded that the payment was not directly linked to the income generated by the paying entity. The court emphasised the importance of examining this correlation. It also highlighted the need to determine that the expense can be deducted, if the compensation is given in exchange for real and effective services rendered for the entity and provided that there is a correspondence between these services and the established consideration. This is to ensure that the latter cannot be classified as excessively burdensome for these purposes.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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