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Tax withholding for administrators in Spain – based on their roles and responsibilities

Tax withholding for administrators in Spain - based on their roles and responsibilities by Leialta

The withholding taxes for administrators in a company vary based on whether they work as employees or executives. In this post, we will examine the specific withholding rates and the deductibility of their remuneration for Corporate Income Tax purposes.

What withholding tax applies to administrators for Personal Income Tax (IRPF)?

The withholding tax for administrators is determined by the roles they undertake. There are three different cases:

  1. When the administrator acts as an employee of the company, their daily tasks, such as sales, marketing, or financial functions, are subject to variable withholding tax rates, similar to other employees.
  2. If the administrator performs administrative functions for the company, a withholding tax rate of 35% applies to their payroll. However, if the company’s turnover in the last tax period is less than 100,000 euros, the applicable withholding tax rate is 19%. This 19% rate also applies to newly established entities.
  3. When the administrator works as a manager or as an executive for the company, the withholding tax applied is either 35% or 19%, as mentioned in the previous case. This is because of the theory that the administrator and manager positions are linked. In many small or medium-sized companies, the owner or manager often fulfills administrative duties as well.

Is the remuneration of administrators and directors deductible for Corporate Income Tax purposes?

The deductibility of remuneration for directors and administrators has long been unclear to tax authorities when it does not comply with corporate regulations, particularly the Corporate Income Tax Law. According to the law, expenses resulting from actions contrary to the legal framework are not deductible. To comply with this regulation, certain requirements must be met, including the specific regulation of administrators’ remuneration in the company’s bylaws.

In several cases, the Central Administrative Economic Court (TEAC) has held that if the company’s bylaws do not establish remuneration for the position, the remunerations are considered contrary to the legal framework as they violate the bylaws, and therefore, are not deductible. This interpretation has been challenged on multiple occasions by the Supreme Court, which argues that cases where deductibility is denied must involve serious actions such as bribery.

In a ruling by the National Court dated September 21, 2022, a case is addressed where a company regulates the remuneration for the administrator’s position in its bylaws without specifying specific amounts. In this case, the National Court supports the deductibility of the remunerations.

Impact of the administrator’s remuneration and incentives for family businesses

In relation to the above, it is important to highlight the benefits that shareholders of companies engaged in economic activities can enjoy under a special regime that specifically applies to family businesses. This regime offers the following advantages:

  1. The company’s shares will be exempt from taxation in the wealth tax.
  2. The transfer of shares from parents to children or other relatives through inheritance or donation by individuals over 65 years old is subject to a 95% reduction in inheritance and gift tax.
  3. Donations that benefit from the aforementioned reduction are not subject to personal income tax (IRPF) for the donor.

To qualify for these benefits, the following requirements must be met:

  1. The shareholder’s individual participation in the company must be at least 5%, or 20% if shared with other family members such as a spouse or ascendants.
  2. The company’s non-business assets must not exceed 50% for more than 90 days in a year.
  3. The shareholder must hold managerial responsibilities within the company and receive remuneration representing more than 50% of their overall income from work and economic activities.

In conclusion, correctly applying the withholding tax for administrators under Personal Income Tax (IRPF) and determining the deductibility of their remuneration is a complex matter that involves various interpretations. Seeking guidance from a specialized business consultancy is crucial in order to analyze the specific case, explore alternative options, consider applicable regulations, and prepare accurate payroll statements for administrators with the appropriate IRPF withholding.

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