Deductibility of the salary of the sole shareholder and director

In the present case in Castilla y León, the controversy arises as to whether or not the salary or wages of a person who is both the sole shareholder of a company and its director are deductible for corporate income tax purposes.

The Tax Agency considers that it is not deductible, stating that there cannot be an employment relationship between the director or sole shareholder and the company as there is no evidence of dependence or employment outside the company as required by the Workers’ Statute. It also states, in accordance with the theory of the dual relationship, that, if the applicant holds the position of director of the company and at the same time performs management duties, the former prevails and, given that the position of director is free of charge, any payment made is a gratuitous and non-deductible payment.

According to the claimant, by demonstrating that the partner or administrator performs an effective work or service within the productive activity of the company, it admits the deductibility of 100% of the salary of the partner or administrator.

The Regional Economic-Administrative Court of Castilla y León upheld the appeal and allowed the deductibility of 100% of the salary of the partner or director, stating that it is considered proven that the person in question carries out activities that go beyond the duties inherent to the position of director.

Objective. Issue raised

The annulment of the provisional corporate income tax settlement for 2014.

Requests made by the applicant

• The automatic suspension of the execution of the contested agreement is agreed.
• That a joint and several surety be provided by the financial institution as security for the payment of the debt claimed, the guarantee provided being sufficient to ensure the payment of the contested act, the interest generated by the suspension and any surcharges that may be payable.

Arguments

The taxable person relies, in order to defend the deductibility of the salary, on the company’s articles of association, and states that what is really decisive is that it can be shown that the partner or director performs actual work or services within the productive activity of the company and does not merely direct or manage it.

In its provisional and final tax assessments, the Tax Agency considers that it is not deductible, stating that there cannot be an employment relationship between the administrator or sole shareholder and the company as there is no evidence of dependence or outside employment as required by the Workers’ Statute. On the other hand, he develops the theory of the double bond, which implies that if a person holds the position of director of a company (commercial relationship) and at the same time performs management tasks for that company (special senior management employment relationship), the former must take precedence, concluding that, given that, according to the company’s articles of association, the position of director is free, any payment made to the sole shareholder or director would be a liberality and, therefore, non-deductible.

Procedural structure

The Tax Agency notifies the taxpayer of the proposed assessment of the 2014 Corporate Income Tax. The taxpayer expresses his disagreement with the Provisional Settlement Proposal, submitting a written statement of allegations and providing all the appropriate documents or evidence to defend his rights. The Tax Agency issued the Resolution with provisional assessment and the taxpayer proceeded to file an economic-administrative claim requesting the automatic suspension of the execution of the contested agreement. After making allegations before the Regional Economic-Administrative Court, the Court issues a decision declaring the deductibility of the salary of the sole shareholder and director of the taxpayer.

Judgment or operative part of the court decision

The Court considers that the claimant has accredited the provision by the subject of services other than the administrator’s own tasks, which have been remunerated as such services, without the Management Unit questioning whether such remuneration exceeds the normal market rate, and therefore the deductibility of the same as a personnel expense in corporate income tax must be admitted.

If you have any doubts on this subject, please do not hesitate to contact us, by telephone to Carles Monfort Codina or by e-mail to cmc@btsasociados.com, we will be delighted to help you.