Administrators' Remuneration. Deductible Expense?

We are often asked whether Administrators’ Remuneration is a deductible expense. In other words, when is the administrators’ remuneration deductible in Corporate Tax?

In order to answer this, the Supreme Court Judgment of 13/November/2008 will have to be analysed first. Better known as the “Mahou ruling“. From which the experts of our Tax Consulting department, extract different criteria.

Administrators’ remuneration. When is a deductible expense?

In order for the remuneration of the position of administrator to be deductible in the Corporate Tax, the remunerated nature of this position must be stated in the statutes. However, the amount of such remuneration must also be reflected with sufficient certainty. The following requirements must be met:

The Articles of Association must specify the specific remuneration system. Therefore, their alteration will require the appropriate amendment to the Articles of Association.
If the system is variable. That is, with a share in the company’s profits, the percentage must be perfectly determined in the bylaws. A maximum limit is not enough.
When it is a fixed amount. It is necessary that the articles of association provide for the amount or at least the criteria that make it possible to determine perfectly, without any margin of discretion, its amount.

Shading of the TEAC.

However, on 9 April 2019, the TEAC (Administrative Economic Court of Spain) published resolution R.G. 3295/2016. In which it is established that only 2 requirements of the previous 3 will be necessary:

Requirement that the company’s articles of association state the remunerative nature of the position of director.
That the statutory provision allows the amount of such remuneration to be known with sufficient certainty, and for this it is necessary that at least 3 requirements specified in the Judgment of 13 November 2008 (sixth and tenth FFDD) are met:
- The bylaws must specify the specific remuneration system. Therefore, their alteration will require the appropriate amendment to the Articles of Association.
- In the event that the system is variable, with a share in the company’s profits, the percentage must be perfectly determined in the bylaws. A maximum limit is not enough.

But in this case, the third requirement of the famous Judgment of 13 November 2008 is no longer taken into account. Rather, in the event that the Articles of Association stipulate a fixed amount to be specified each year by the General Meeting, the expense must be admitted as a deductible, as long as the minutes of the General Meeting exist.

In conclusion

In order for the expense to be deductible in corporate income tax, the following requirements must be met:

That the nature of the remuneration is reflected in the Articles of Association.
Specify in the bylaws the remuneration system to be applied.
In the case of variable remuneration, specify the specific percentage.
In the case of a fixed amount, it is acceptable that the exact amount does not appear, but rather that reference is made and it is indicated that the amount will be approved each year by the General Meeting.

When are functions different from those of the position of Administrator exercised?

There are situations in which the directors of the company, while exercising their functions as a director, provide a series of services and perform work/functions different from those of the position itself. And therefore, for this position they receive a specific remuneration independent of the one they could receive for the position of administrator.

The deductibility of this type of remuneration must be analysed independently.

The criteria being followed by the Directorate General of Taxes in various published binding queries, such as V2289-15, V1614-15, 3796-15, and V2335-15, is as follows:

“regardless of the relationship that the individual has with the entity for the work performed, whether it is an employment relationship (receiving payroll) or a mercantile relationship (invoiced as self-employed), these remunerations are considered to be tax-deductible expenses in corporate income tax in the paying company.

Provided that the legally established conditions are met, in the terms of accounting registration, imputation according to accrual, correlation of income and expenses and justification.

It should also be pointed out that, in order to justify that these remunerations are not effectively received by the position of administrator, it will be necessary to reflect in the minutes of the shareholders’ meeting, which has been authorised to receive a certain remuneration in the capacity of that specific position. This remuneration must be independent of the position of director. This remuneration, as explained above, must be reflected in the company’s articles of association.

Types of Withholdings

As regards withholdings, according to Law 35/2006, of 28 November, on Personal Income Tax. The different types of withholding that the administrator/member of the company will receive for the different services rendered in fiscal year 2019 are as follows:

Position of Administrator. The remuneration received for the position of director and for the development of management tasks will be considered work income, with a fixed retention of 35%. If in the year prior to the payment of the income the company had a turnover of less than €100,000, this retention would be 19%.
Payroll. Remuneration received for work not carried out by management is also considered to be income from work. But the retention in this case is variable, depending on the general IRPF tables.
Professional Partners. In the case that the company provides professional services, and the partner and administrator is who performs these services. The remuneration received for these services is considered income from economic activity. With the corresponding withholding of 15%.