Recently, the Supreme Court, through a recent decision rendered in June 2022, ruled that the directors or board membersbenefit, like any other worker, from exemption from Personal Income Tax (hereafter “IRPF”) for the work actually carried out abroad.
Remember that the reference exemption, as an important incentive for the internationalization of Spanish companies, is established in Article 7.p) of the Personal Income Tax Law and, likewise, is regulated in Article 6 of the personal income tax regulations. This significant exemption from personal income tax is established, according to its requirements, for the first 60,100 euros per year on work income received for work actually carried out abroad. On the other hand, to center the legal debate of this article, it is necessary to mention the provisions of art. 17.2.e) of the law relating to income tax on natural persons (hereinafter “LIRPF”), which establishes that, in all cases, the remuneration of directors and members of the boards of directors, councils who are doing their time and other members of other body representatives.
Well, the facts related to the case were as follows: following an inspection action, carried out on the company AZVI, SA which ended in a few minutes of disagreement on July 19, 2013, the inspection actuary considered that This exemption was not applicable in this case because it was consideration paid for trips made because of his quality of director of the entity, which has no relationship with his company from which the requirements of dependence and otherness that constitute working relationships on behalf of extraterrestrial Thus, the aforementioned control act determined that the said sums were subject to a withholding tax at the rate of 35% in accordance with the provisions of article 101.2 of the LlRPF; Consequently, a debt to be paid amounting to 92,356.09 euros corresponding to the deposit and 17,107.13 euros corresponding to late payment interest.
Faced with the aforementioned acts in disagreement, the aforementioned company filed an administrative economic claim with the central economic administrative court (TEAC), which was rejected by Resolution of October 5, 2017. Subsequently, AZVI, SA filed a contentious-administrative appeal (no. 485/2017) before the National Court (AN) against the aforementioned TEAC Agreement. The AN, by judgment 742/2020 of February 19, 2020, granted the appeal deduced by the aforementioned trader. From the aforementioned decision, we can extract that the AN, in its SEVENTH legal basis, interprets the law as follows:
“Interpreting the exemption in question on the basis of the established parameters, it can be seen that Article 7 p) declares as exempt income “income from work carried out abroad”. The precept refers to “work income”, in a generic way, which, as we have seen, appear to be regulated in article 17 of the LIRPF; but it does not specify whether it concerns all the work income referred to in the said article or only some of them, in particular those resulting from an employment or statutory relationship.
This is also consistent with the objective that has been given to the incentive for the internationalization of human capital (which is not only labor or statutory personnel) with residence in Spain who travel to work abroad.
It should be noted, however, that in the case we are analyzing, most of the services rendered abroad by CEOs can be qualified as executive and managerial functions and not simply deliberative; and not forgetting that the Supreme Court has indicated that Article 7 p) does not prescribe what the nature of the work should be, and in particular, it does not prohibit that it be supervisory or coordination tasks, and that the beneficiary of the work is not only the non-resident entity, but also, and among others, the employer entity of the beneficiary of the work income (or the one in which he provides his services). »
Not agreeing with the expired administration at the headquarters of the AN, the latter filed a Contentious-Administrative Appeal (n° 3468/2020) opposing the reasoning put forward by the AN and considering that the exemption established in art.7p) of the LIRPF It is not applicable to the members of the board of directors of a commercial company since the expression employment income received for work actually carried out abroad appearing in article 7.p) LIRPF, It cannot be applied to income from the management and control of the participation in the board of directors of a subsidiary abroad, they therefore do not give rise to the exemption provided for in the precept indicated..
Finally, the Supreme Court, in the reasoning provided in Judgment No. 790/2022, points out that the interpretation of the tax regulations by the Treasury was erroneous, namely (Foundations of the third law): “This is a restrictive interpretation that has no support in a literal, logical, systematic and definitive interpretation of article 7, p) LIRPF. It makes no sense to admit that the exemption does not include the remuneration of directors, although there is an express provision in said letter e) of article 17.2 LIRPF, without discussing the category of work carried out, especially when, as proved in the example, the remuneration received by the two directors derives from the exercise of executive and managerial functions; and this assessment cannot be reviewed in cassation.
In principle, it is undeniable that the income received by directors and members of the board of directors can benefit from the exemption in question. This is what happened on this occasion, since this conclusion is drawn without engaging, strictly speaking, in a debate on the type of work carried out abroad.».
This criterion of interpretation, established by the highest Court, contributes More clarity and tax legal certainty to the treatment of income from work actually carried out abroad.
As you can see, once again Supreme Court reaches out to workers working overseas allowing, on the one hand, the internationalization of the Spanish company and, on the other hand, the retention in Spain of human capital.
In view of all the above, companies should check annually that the work actually carried out abroad by the directors and the members of the boards of directors, of the boards replacing them and of other members of other bodies representative, comply with the provisions of the Personal Income Tax Law and Regulations to benefit from the aforementioned exemption. In the same vein, it would be desirable for IRPF taxpayers to analyze the possibility of challenging IRPF self-assessments to obtain a refund from the Treasury.
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