The General Directorate of Taxes(DGT)has reconfirmed the possibility of a company deducting from corporation tax the remuneration of the sole administrator who provided services for the company itself through an employment contract, obtaining the corresponding salary for it.
The case in question concerns a small construction company, with a single partner and sole administrator, who by agreement in the Articles of Association did not receive remuneration for his position, and who in turn, provided services for the company itself through an employment contract, by which he performed the functions of construction manager, along with some of the administration’s own, such as personnel selection, billing control and commercial management, and for all this he received a monthly payroll whose remuneration was set based on the sectoral Collective Agreement.
The question raised and resolved by the DGT, was whether the company could deduct from corporation tax, the remuneration paid by employment contract, even if the one who provided the services was the sole partner and administrator of the company.
The consultation itself has its importance because not long ago, before the approval of Law 27/2014, of November 27, on Corporation Tax (LIS), the existing doctrine to date understood that if the functions of administrator of the company with executive functions of senior management converged in the same person, the link between administrator and executive was prevalent, even if the function of administrator was not remunerated, thus understanding the doctrine prior to the approval of this Law, which was considered absurd to hire a person to perform tasks that had already been forced by his status as administrator.
Currently with the new Corporate Tax Law, the legislator has wanted to fix the change in the interpretation of this type of assumptions, however, the different possible variants and the short time that this Law has been applied, forces the DGT to pronounce on isolated and concrete cases that allow us to understand even more our current doctrine.
First we must understand that the assumption of the consultation, being the existing relationship of a single partner and administrator with the company itself, we must frame ourselves in what they call “related transactions”, which are those transactions of transfer of goods and / or services between related parties, and not independent of each other, that is, the relations that occur between the company and its partners, relatives, administrators, group companies, investee companies, etc... On these operations falls a limitation on the value that these operations can have, forcing the company to when there are related transactions valued at normal market value, this being understood as having been agreed between independent persons or entities within the conditions of the market of free competition.
The regulation of related transactions is in article 18 of the LIS, which defines as such the relations between the company and its participating partners or its administrators, also indicating that their participation in the company must be at least 25%, being included in this calculation the administrators of law and those of fact.
Our assumption, it is therefore a related operation, which meets the requirements both that the partner himself has a percentage greater than 25%, and that the salary received by the administrator based on his employment contract, is within the market value, since the remuneration he received was the one that was set by the sectoral Collective Agreement itself.
Consideration of tax-deductible expense.
The remuneration for employment contract of the sole administrator is considered a tax-deductible expense as deduced from article 15.e of the LIS in which it initially refers to the non-tax-deductible expenses of donations and gifts, but in the same precept an exception is added in which it says that the remuneration to the administrators for the performance of senior management functions, or other functions derived from an employment contract with the entity, will not be understood to be included, so as a conclusion it allows its deduction from corporation tax.
Requirement to be able to apply the deduction.
As a requirement to be able to apply this deduction in corporate tax, we will have to be in accordance with the provisions of article 11 of the LIS, which states that:
“1. Income and expenses arising from transactions or economic events shall be charged to the tax period in which they accrue, in accordance with accounting rules, irrespective of the date of their payment or collection, respecting the due correlation between them…”
“3. 1º Expenses that have not been charged to the profit and loss account or in a reserve account shall not be tax-deductible if so established by a legal or regulatory rule, except as provided for in this Law with respect to assets that can be amortized freely or in an accelerated manner.”
Therefore, so that the remuneration for employment contract of the sole administrator is computed as a tax-deductible expense for the purposes of Corporation Tax, the legal conditions in terms of accounting registration, imputation according to accrual, correlation of income and expenses and documentary justification will have to be met, since those expenses constitute consideration for the functions performed by the members, other than those corresponding to those of administrator.