As a result of Law 31/2014 of 3 December, amending the Capital Companies Act to improve corporate governance, a series of changes have been introduced in the corporate regime for the remuneration of directors of capital companies (public limited companies and limited liability companies).
This is a complex, slippery subject, and to a certain extent, it is scary to give an opinion on it. However, people come to Notaries and ask questions, considering that the Notary knows everything, and although this is not true, the truth is that we owe it to all those who put their trust in us and that is why I have dared to write these lines, with the aim of being useful to whoever may read them.
I think the complexity of the matter is determined by the fact that it is an issue that is affected by commercial, tax and labour laws, and achieving a joint interpretation of all of them is what causes us difficulty.
A) THE BACKGROUND
In the 1951 Joint Stock Companies Act, the only provision regarding the remuneration of directors was that it had to be stated in the bylaws, in the sense that they had to establish the fact of the remuneration, but not the amount, which could be specified for each financial year by the General Shareholders' Meeting, with certain limitations in the case where the remuneration was a share in profits. In practice, directors or more strictly members of the Board of Directors of companies, if they did not receive remuneration as such, if they performed executive functions, they could have it through a senior management employment relationship or a civil service leasing relationship, with the remuneration as administrator, if any, being compatible with the employment or civil relationship.
This theoretical approach, which was also applicable to limited liability companies, began to break down as a result of various rulings that have been issued in the labor field, and thus the Supreme Court ruling of November 29, 1988, issued in the so-called Huarte case, establishes what is called attachment theory and declares that there cannot be two different titles - employment and corporate - for the remuneration of administrators, giving preference to the corporate relationship, rendering the employment relationship void.
The consequence of this theory ends up being twofold, since from a fiscal point of view, the tax authorities consider that the amounts paid to the administrator, outside the statutes, by virtue of an employment or civil relationship, were not deductible expenses in corporate tax, and from a work point of view, compensation or other consequences arising from labor legislation were not applicable due to the termination of the relationship between the administrator and the company, outside the statutes.
B.- THE MAHOU CASE JUDGMENT. THE MILLIMETER THEORY.
The above situation is blown up by the Supreme Court ruling of November 13, 2008, and whose doctrine was confirmed by others, dated February 21 and September 26, 2013, which states that for the accounting expense derived from the remuneration of the directors to be deductible in the corporate tax, it was necessary that this remuneration was correctly reflected in the company bylaws, in the sense that the amount of the remuneration should also be fixed (doctrine of the millimeter that Paz-Ares speaks of).
C.- THE TAX AGENCY REPORT OF MARCH 12, 2009.
The potential impact of this doctrine prompted the Tax Agency to react and, in a report dated 12 March 2009, it declared that if the bylaws of a company, whether limited or anonymous, state that the position of director is paid, even if the requirements for certainty established by the Supreme Court rulings in question are not met, they will be considered a tax-deductible expense in accordance with the current regulations of the corporate tax law, given that they represent an accounting expense, are recorded in the company's results, do not represent a gift and the corporate tax law does not establish any specific particularity regarding the conditions that these accounting expenses must meet.
That is to say, it qualified, for tax purposes, the rigor of the aforementioned rulings, in the sense that it was not necessary to set the amount of the remuneration in the statutes, although it was necessary to determine the paid nature of the position, but all of this with the aim of being able to deduct the amount of the administrator's remuneration as an expense.
D.- THE INCREASE IN THE REMUNERATION WITHHOLDINGS OF ADMINISTRATORS.
As a result of the economic crisis, and with the aim of increasing tax collection or at least liquidity, for the year 2012, within the fiscal measures adopted by the Rajoy Government upon taking power, through RD 20/2011 of 30 December, is the increase in withholdings from the remuneration of directors in Income Tax. The AEAT declares that although these remunerations derive from the formalization of a senior management contract, it must be taken into account that the Supreme Court, in a reiterated jurisprudence, has considered that with respect to the directors of a company with which they have signed a senior management employment contract that involves the performance of the activities of direction, management, administration and representation of the company proper to said position (that is, the representation and management of the company), it must be understood that their link with the company is exclusively of a commercial nature and not of an employment nature, since said functions are understood to be subsumed within those of the position of director.
Therefore, all remuneration received for the exercise of the functions of the position of director, regardless of whether a senior management employment contract has been signed, will be included in the employment income provided for in article 17.2.e) of the LIRPF, which establishes that in all cases, and therefore regardless of their commercial nature, the following will be considered as employment income: the remuneration of directors and members of the Boards of Directors, of the Boards that act in their place and other members of other representative bodies.
The withholding percentage applicable to amounts received for being an administrator was set at 42% for the years 2012, 2013 and 2014, and has been reduced to 35% for the present year.
E.- THE SOCIAL SECURITY SYSTEM.
On the other hand, administrators, depending on the function they perform in the company, may be included in the General Regime, in the regime assimilated to the general regime or in the self-employed regime.
F.- LAW 31/2014 OF DECEMBER 3, WHICH AMENDS THE LAW ON CAPITAL COMPANIES.
Law 31/2014 modifies the internal aspects, i.e. those that govern the relationship between company and administrator, regarding the remuneration of administrators, but the truth is that its pronouncements are also effective in their labor and fiscal aspects. Although the law treats listed and non-listed companies differently, we are going to refer exclusively to the subject of non-listed companies. The general rules of the reform are the following:
A´) The free nature of the position as a general rule.
As regards the remuneration system for directors, both for public limited companies and limited liability companies, it establishes the general rule of free of charge of the position, unless the bylaws establish otherwise (article 217.1 LSC).
B´) The determination of the remuneration system as a requirement of the statutes.
The remuneration or compensation system established in the bylaws must establish the remuneration concept or concepts. Therefore, the bylaws must establish the specific remuneration system or concept., establishing article 217.2 LSC an enumeration for example pointing out as possible modalities: a) a fixed allocation, b) attendance allowances, c) profit sharing, d) variable remuneration with general reference indicators or parameters, e) remuneration in shares or linked to its performance, f) severance pay, provided that the termination was not motivated by failure to perform the functions of administrator, g) savings or pension systems that are considered appropriate.
These systems are not limiting, so that other systems may be established in the bylaws, such as the use of the company's assets or the use of its means of transport or the company's cooperation in the development of the partner's private business, or the purchase of products made by them, payment of self-employed contributions to social security and, ultimately, any system that represents a benefit or utility for the administrator and that can, due to its market price, be economically evaluated.
It is also possible to establish several of the systems described above, whether legal or those that suit the partners, but if two or more of them are established, this must be done cumulatively and not alternatively, because if this were done, the remuneration system would be left to the discretion of the Board, generating uncertainty.
C´) The determination of the amount of remuneration is a matter for the Board.
Whatever the system chosen by the bylaws, in accordance with article 217.3 LSC, its maximum amount for the group of directors must be set by the general meeting, but this quantum It is not necessary for it to be stated in the bylaws, although it is obviously not prohibited. In any case, it does not seem very appropriate to set the amount via bylaws, because it would require a quorum to amend the bylaws, to which must be added the inconvenience of publicising, in front of everyone, the possible salary or remuneration of an administrator.
D´) . Distribution of remuneration among directors.
If there are several directors, the distribution of remuneration among them does not have to be equal. In accordance with article 217.3 LSC, the distribution among the different directors of the total remuneration set for all of them is a matter that is left in principle, and unless the Board says otherwise, in the hands of the directors themselves, although it may also be stated in the bylaws.
E´) Generic limits on the remuneration of the administrative body.
Article 217.4 of the LSC establishes the following limits: a) Its reasonableness in relation to the importance of the company; b) Its reasonableness in relation to the economic situation of the company at the time of setting the specific remuneration. C) Its reasonableness in relation to market standards for companies with similar characteristics.
F´) Purpose of the established remuneration system.
Art. 217.4 LSC also contains a rule aimed at indicating the purpose that the remuneration system of the administrative body must have, which must be aimed at promoting the long-term profitability and sustainability of the company and incorporate the necessary safeguards to avoid excessive risk assumption and the reward of unfavorable results.
G´) . Special case where the remuneration is a participation in profits.
According to article 218 LSC, when the remuneration system includes a share in profits, the bylaws will specifically determine the share or the maximum percentage thereof. In the latter case, the general meeting will determine the applicable percentage within the maximum established in the bylaws.
In limited liability company, the maximum percentage of participation may in no case be higher than ten percent of the profits distributable among the partners.
In a public limited company, the share may only be deducted from net profits and after the legal and statutory reserves have been met and after the shareholders have been recognized a dividend of four percent of the nominal value of the shares or the highest rate established by the statutes.
H´) . Special case of remuneration linked to the company's shares.
This is addressed in article 219 LSC, which is applicable only to public limited companies, and states that when the remuneration system for directors includes the delivery of shares or stock options, or remuneration referenced to the value of the shares, it must be expressly provided for in the bylaws and its application will require an agreement by the general meeting of shareholders.
The resolution of the general meeting of shareholders must include the maximum number of shares that may be assigned in each financial year to this remuneration system, the exercise price or the system for calculating the exercise price of stock options, the value of the shares that, where applicable, is taken as a reference and the duration of the plan.
I´) Breaking the theory of the link.
The most important novelty introduced by Law 31/2014 of 3 December is the possibility of combining remuneration of the administrator as such, which in accordance with article 217 LSC is subject to statutory registration and the establishment of a maximum amount by the General Meeting, with the collection of other amounts for the performance of executive functions, attributed upon being appointed Managing Director or by virtue of another title, which in accordance with article 249.3 LSC, require that a contract be signed between the latter and the company that must be previously approved by the board of directors with the favourable vote of two thirds of its members. The affected director must abstain from attending the deliberation and from participating in the vote. The approved contract must be included as an annex to the minutes of the meeting.
There are quite a few doubts that are being generated by this matter of remuneration due to the distinction between the functions of the administrator. as such and the executive functions.
The first is that the law does not differentiate between the two types of functions, but as an approximation to the subject we can point out that the administrator as such is responsible for management, that is, the internal organization of the company, and representation of the company, that is, acting on its behalf.
The distinction between both functions is clearly seen when there is a Board of Directors, comparing the function performed by the Director alone with that performed by the Executive Director. The latter is the member of the Board of Directors who is entrusted with the day-to-day management of the company, with the function of the ordinary directors being deliberative. And these two deliberative and executive functions are differentiated in the following points:
1.- The deliberative function is developed within a Council, in a collegial manner and intermittently, that is, when the body meets; while the executive function is developed individually and continuously.
2.- The purpose of the deliberative function is supervision while that of the deliberative function is management.
3.- The deliberative function is more political while the executive function is technical.
This system of dual remuneration concepts is applicable, in principle, exclusively when the administration of the company is assigned to a Board of Directors, since article 249 LSC requires a corporate administration contract. When there is another administration system, there could be, as we have indicated, a different amount of remuneration for the directors, which must be set by agreement between them, unless the company bylaws or the Board of Shareholders establishes otherwise.
And the second major doubt raised by this article 249.3 LSC is whether the remuneration received by the CEO or Executive Director, by virtue of this corporate administration contract, is subject to statutory reservation, and must be included within the maximum remuneration to be received by the Directors, or on the contrary, can be freely agreed by the Board. As arguments for the statutory reservation, it is pointed out that otherwise the CEO's remuneration would be opaque, but in reality it is a finalistic interpretation that does not comply with the strict provisions of the law, according to which the executive director's remuneration is at the discretion of the Board.
J.- The administrator may collect other amounts.
Obviously, all the above exposition is directed at the remuneration of the directors for the exercise of their position and/or their executive functions, but the truth is that the directors can perform other functions, and become integrated into the company as any other worker, whose services may be equally remunerated.
In this case, the problem is of a strictly fiscal nature and two situations must be distinguished:
a´).- The administrator who receives remuneration from the company for carrying out activities included in the Second Section of the IAE Rates (professional activities). This situation is referred to in the new third paragraph included in article 27.1 of the Personal Income Tax Law approved by Law 26/2014 on the tax reform of the Personal Income Tax, which considers that the amounts received must be declared as income from economic activities if the administrator is included in the self-employed regime or in a social welfare mutual fund (REAT).
b´) The administrator receives remuneration from the company for carrying out activities not included in the Second Section of the IAE Rates. In this case, the amounts received are personal work income if the notes of dependency and means of production at the company's headquarters are met and subject to withholding at the rate determined according to the general procedure and are income from economic activity if the notes of dependency and means of production at the company's headquarters are not met.
K) Amendment to the corporate tax law
The new Corporate Tax Law 27/2014, effective from 01-01-2015, establishes a clarification regarding the remuneration of directors as a deductible expense, by expressly stating that the remuneration they receive for the performance of senior management functions and for other functions derived from an employment contract with the entity are not considered gratuities and therefore, if they meet the rest of the requirements, they may be deducted.
