Post by Vicente Bootello on Jul 15, 2009 23:30:15 GMT 4
Spain: Deductibility of board member compensation
Garrigues
Vicente Bootello
There have been some new developments recently in the case law relating to the right to deduct the remuneration paid to members of the board of directors for corporate income tax purposes.
We refer to two Supreme Court judgments dated November 12 2008, which challenge the deductibility of such remuneration.
Historically, according to tax legislation in force until 1995, specifically article 13 of corporate income tax law 61/1978, of December 27 1978, expenses needed to obtain income were deductible and the law listed certain expenses that were considered fully deductible, of which two were particularly noteworthy: first, amounts accrued by third parties as direct or indirect consideration for personal services, and second, directors' shares in the income of the entity, provided that such shares were mandatory under the bylaws or were approved by the competent body and did not exceed 10% of the entity's income.
In this regard, the factual scenario upon which the judgments are based is that of an entity whose bylaws stipulate that "The Directors' compensation shall consist of a fixed allowance with the possibility of annual review and a share in income, subject to the statutory limit.
In any event, where it consists of a share in the income of the company, it shall be subject to a maximum limit of 10% of such income and may only be deducted in the manner and subject to the limits established in the legislation currently in force", and according to the facts described in the judgments, this remuneration had been determined by the shareholders' meeting.
On the basis of the facts set forth (which coincide in both judgments), we must highlight the Supreme Court's conclusion, which is simply that, in order for compensation paid to board members to be tax deductible, it must be mandatory (a requirement that would ostensibly be met if the compensation were set forth in the company's bylaws) and, therefore, necessary to obtain revenues.
However, the problem which these judgments raise is how such remunerations should be reflected in the bylaws since, according to the case law mentioned:
* A specific remuneration system must be established. Although corporations may elect to apply different remuneration systems, whichever form they choose (i.e., fixed, variable, or a mix of the two), it must be clearly defined in the entity's bylaws. It is not sufficient, for the deductibility thereof, for the bylaws to contemplate various remuneration systems for the directors, leaving it to the shareholders to determine which of them should be applied.
* If the system chosen is a variable amount consisting of a share in the company's income, it is not enough to stipulate a maximum limit for that share; rather, the percentage must be precisely stated in the bylaws as otherwise, the legal provision will not be met.
* Where the bylaws stipulate for a fixed emolument for directors, it is not enough to simply provide for its existence and mandatory nature; rather, the bylaws must in all cases set the quantum or, at least, the criteria to be applied to determine the amount in a precise manner without any margin for subjectivity.
The good news is that the Directorate-General of Taxes (DGT) issued a report on March 12 2008 stating that these judgments are not directly applicable to the corporate income tax law in force. The Directorate-General has also stated that board members' compensation is tax deductible as long as it is established in the bylaws (if the remunerated nature of the post is stipulated in the by-laws), and as long as the said expenses are recognised in the entity's accounts in accordance with Spanish accounting rules.
In view of the above, Spanish companies may wish to review their bylaws and make the appropriate modifications where necessary.
Vicente Bootello (vicente.bootello@garrigues.com)
Garrigues
Vicente Bootello
There have been some new developments recently in the case law relating to the right to deduct the remuneration paid to members of the board of directors for corporate income tax purposes.
We refer to two Supreme Court judgments dated November 12 2008, which challenge the deductibility of such remuneration.
Historically, according to tax legislation in force until 1995, specifically article 13 of corporate income tax law 61/1978, of December 27 1978, expenses needed to obtain income were deductible and the law listed certain expenses that were considered fully deductible, of which two were particularly noteworthy: first, amounts accrued by third parties as direct or indirect consideration for personal services, and second, directors' shares in the income of the entity, provided that such shares were mandatory under the bylaws or were approved by the competent body and did not exceed 10% of the entity's income.
In this regard, the factual scenario upon which the judgments are based is that of an entity whose bylaws stipulate that "The Directors' compensation shall consist of a fixed allowance with the possibility of annual review and a share in income, subject to the statutory limit.
In any event, where it consists of a share in the income of the company, it shall be subject to a maximum limit of 10% of such income and may only be deducted in the manner and subject to the limits established in the legislation currently in force", and according to the facts described in the judgments, this remuneration had been determined by the shareholders' meeting.
On the basis of the facts set forth (which coincide in both judgments), we must highlight the Supreme Court's conclusion, which is simply that, in order for compensation paid to board members to be tax deductible, it must be mandatory (a requirement that would ostensibly be met if the compensation were set forth in the company's bylaws) and, therefore, necessary to obtain revenues.
However, the problem which these judgments raise is how such remunerations should be reflected in the bylaws since, according to the case law mentioned:
* A specific remuneration system must be established. Although corporations may elect to apply different remuneration systems, whichever form they choose (i.e., fixed, variable, or a mix of the two), it must be clearly defined in the entity's bylaws. It is not sufficient, for the deductibility thereof, for the bylaws to contemplate various remuneration systems for the directors, leaving it to the shareholders to determine which of them should be applied.
* If the system chosen is a variable amount consisting of a share in the company's income, it is not enough to stipulate a maximum limit for that share; rather, the percentage must be precisely stated in the bylaws as otherwise, the legal provision will not be met.
* Where the bylaws stipulate for a fixed emolument for directors, it is not enough to simply provide for its existence and mandatory nature; rather, the bylaws must in all cases set the quantum or, at least, the criteria to be applied to determine the amount in a precise manner without any margin for subjectivity.
The good news is that the Directorate-General of Taxes (DGT) issued a report on March 12 2008 stating that these judgments are not directly applicable to the corporate income tax law in force. The Directorate-General has also stated that board members' compensation is tax deductible as long as it is established in the bylaws (if the remunerated nature of the post is stipulated in the by-laws), and as long as the said expenses are recognised in the entity's accounts in accordance with Spanish accounting rules.
In view of the above, Spanish companies may wish to review their bylaws and make the appropriate modifications where necessary.
Vicente Bootello (vicente.bootello@garrigues.com)