New legislation, at the fiscal and commercial level, regarding the remuneration of the management body
As we announced in the first part of the article, in this installment we will try to resolve a series of questions that arise around the remuneration that directors receive outside of the exercise of their position:
1. Can an administrator provide professional services or perform other types of work for the company they manage, outside of the scope of their official duties?
Yes, members of the board of directors may perform other services for the company, beyond their official duties, and receive remuneration for them. However, these relationships must be governed by the principles that regulate the relationship between the director and the company they manage. Therefore, they must take into account, among other rules, those governing conflicts of interest, theduty of loyalty , and the duty of care that every director must uphold.
In a limited liability company, the establishment or modification of any kind of service or work relationship between the company and one or more of its directors also requires the agreement of the general meeting (art. 220 LSC).
In any case, it is advisable to have a written contract between the administrator and the company that regulates these relationships.
2. How should the income received by the administrator as a result of providing this type of service be taxed?
If the director is an individual, this income must be included in their Income Tax Return, either as employment income or as income from business activities. If the director is a legal entity, the income must be declared in its Corporate Income Tax Return.
In any case, these are incomes subject to the regulations on related-party transactions (Art. 18 LIS b)
3. In what cases are these payments to the administrator (natural person) considered to constitute income from economic activities?
Article 27 of the Spanish Personal Income Tax Law (LIRPF) defines income from economic activity as that which, arising from personal labor and capital jointly, or from only one of these factors, involves the taxpayer's self-employed organization of means of production and human resources, or one of these, for the purpose of participating in the production or distribution of goods or services.As highlighted in Tax Agency Information Note 1/12, the core of this definition focuses on:
–the organization on one's own account or, conversely, the non-existence of the characteristics of alienation and dependence that would define an employment relationship and that will hardly occur simultaneously when it is a manager.
– the existence of factors of production within the taxpayer: this will therefore be the factor that generally determines the nature of the income in the matter we are dealing with. Each specific case must be considered, although, in this sense, the aforementioned Information Note expressly pointed to professional activities as those that could have a clearer fit, referring, as the main means of production, to that which resides within the individual providing the service, in their professional qualifications.
To further elaborate on this assertion, the recent tax reform has added a third paragraph to Article 27 of the LIRPF , which defines as income from economic activity that received by a taxpayer in which the following conditions are met:
– That he participates in the capital of the company for which he provides his services
– That these services be considered included in Section Two (Professional Activities) of the IAE rates.
– That, for this purpose, he is included in the Self-Employed Scheme of the Social Security or in a mutual social security alternative to said scheme.
It should also be remembered that there is a specific valuation rule for those services provided by professional partners, natural persons, to a related entity under the conditions and with the delimitation indicated in art. 16.6 of the Corporate Income Tax Regulations.
4. Must an administrator who receives income from economic activities issue invoices with VAT?
In mid- February 2015, the Spanish Tax Agency (AEAT) issued an Information Note addressing this issue, following the incorporation of the third paragraph mentioned in Article 27 of the Personal Income Tax Law (LIRPF). This note essentially clarifies that obtaining income from professional activity in these cases can serve as an indication that the taxpayer may be considered a VAT taxpayer, but this should not be inferred. VAT will only apply to invoicing services if the partner carries out their activity independently, that is, manages their own business . As we have seen, this will be the case in most instances when the partner is also a director.
5- In what cases are remunerations, apart from the exercise of the position, considered to constitute employment income?
Article 17 of the Spanish Personal Income Tax Law (LIRPF) considers employment income to be all payments or benefits, regardless of their name or nature, whether monetary or in kind, that derive, directly or indirectly, from personal work or from an employment or statutory relationship and do not constitute income from economic activities. Therefore, by exclusion, we will consider all other remuneration derived from the director's personal work, outside of their official duties, as employment income.
If you are an administrator of an entity and require professional assistance, we invite you to consult us, regarding your specific circumstances, via our email address ambit@ambitassessor.com or at our offices.
Àmbit Assessor is part of MGI (www.mgiworld.com), one of the world's leading alliances of professional firms, and we are experts in corporate taxation.
We'd be happy to help you.
Marc Ivars,
Attorney
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A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.
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