In its rulings No. 5806/2023 and 6496/2022, both dated February 22, 2024, the Central Economic-Administrative Tribunal (TEAC) has changed its position regarding the deductibility in Corporate Tax of the remunerations of administrators who also have a special senior management employment relationship. The TEAC now aligns with the doctrine established by the Supreme Court (TS) through its recent rulings in the fiscal or tax domain concerning the theory of the link (“teoría del vínculo”).
In the first of these resolutions, the TEAC adopts the TS’s stance, stating, as the latter did, that “it cannot be considered that an administrator of an entity who also provides real, effective services beyond their role as an administrator would not be compensated for those services. If such remuneration is received, it should not be considered non-deductible for the entity paying it based solely on the theory of the link, as this would represent an extreme application of that theory, which, as the Supreme Court noted in the aforementioned ruling, should be avoided.” Consequently, the theory of the link must be rejected in the fiscal or tax context.
Similarly, in ruling No. 6496/2022, also dated February 22, 2024, the TEAC establishes the following criteria:
“The TEAC affirms that it must adhere to the Supreme Court’s rulings of June 27, 2023, and November 2, 2023, in cases where individuals who are board members/administrators of an entity also have a special senior management employment relationship with it. In such cases, the remunerations they receive, which are duly documented and recorded, should not be regarded as being earned within the framework of a business relationship (between the company and the administrator/board member). Instead, they should be considered as remuneration under a labor relationship (between the company and the senior manager), and therefore, to assess their deductibility, they only need to meet the standard requirements for the deductibility of any expense.”
In summary, based on this, it should be considered possible that, in such cases, individuals may receive two types of compensation from a company: on the one hand, those tied to their role as an administrator/board member, whose deductibility depends on compliance with the requirements set by corporate law, as previously noted by TEAC doctrine; and on the other hand, compensation related to any labor relationship with the company, whether regular or special (such as senior management). The tax treatment of the latter should not be affected by the theory of the link without considering the specifics of each case.
In our opinion, this new approach not only impacts the deductibility of expenses but also the withholdings that may need to be applied.
Finally, regarding the corporate law requirements for the deductibility of expenses, the Supreme Court, in its ruling No. 449/2024 of March 13, 2024, is also revising its stance on the deductibility of administrators’ expenses. It has initially established a favorable doctrine regarding the remuneration received by administrators of a business entity, which are documented and recorded. Their omission from the corporate bylaws and any non-compliance should not automatically lead to considering such expenses as a gratuitous gift, making their deductibility inadmissible. According to the principle of matching income and expenses, paragraph two of Art. 14.1.e) of the Consolidated Text of the Corporate Tax Law (TRLIS) and the jurisprudence interpreting it, it is unacceptable for a salary expense directly linked to the business activity and income generation to be classified as a non-deductible donation or gratuitous expense.
Bufete Barrilero expects this approach to be confirmed by the Supreme Court in a pending appeal (as raised in the Order of July 10, 2024).