As is usual every year around the time of approval of the Financial Statements and the holding of the Ordinary General Meeting, it is a good time to review the situation regarding the remuneration of our company’s directors; and check whether we are complying with the applicable regulations, in line with the position adopted by the TS (Spanish Supreme Court) and the TEAC (Spanish Economic and Administrative Court) in recent years. In this way, we will ensure that the remuneration of the company’s directors is tax deductible for corporate income tax purposes.
To this end, three areas of compliance should be considered:
- The Articles of Association shall state whether or not the position of director is remunerated and the applicable remuneration system. When the position of director is remunerated, the Articles of Association must set out exactly what remuneration the directors receive. For example, fixed remuneration, attendance fees, variable remuneration, in which case reference parameters for its calculation should be mentioned, profit-sharing, share-based remuneration, severance pay, and savings or welfare systems must be included. In addition, the remuneration system for managing directors and those directors who perform executive functions must be provided for. In this case, the Articles of Association may include an open list of the remuneration items that may be applicable, indicating that one or more of the following shall apply.
- The general meeting shall approve the maximum annual remuneration of all directors, and, in the event of a board meeting, the board shall distribute it among its members. The maximum amount of annual remuneration of all directors approved by the general meeting shall remain in force until it is amended and shall be in reasonable proportion to the size of the company, its financial position at any given time and the market standards of comparable companies. Unless otherwise provided by the General Meeting or the Articles of Association, this maximum amount shall be distributed by resolution of the directors and, in the case of the board of directors, by decision of the board of directors.
- The company should enter into a contract with the director who exercise delegated or executive functions, which should be approved by the board. This contract shall be submitted to the board of directors for approval and must be attached as an annex to the minutes of the meeting. The majority required for approval is two-thirds (2/3) of its members. The director concerned must abstain from attending the deliberation and from voting the agreement. The contract shall detail all the items comprising the director’s remuneration for the performance of his executive or delegated duties, and he may not receive other remuneration for items other than those stipulated in the contract.
Therefore, as followers of Fashion Business Lawyer, we recommend you to review the remuneration system of the board of directors of your company and check whether: (i) you have included in your company’s Articles of Association the items of remuneration received by the directors; (ii) you have submitted the maximum amount of remuneration for all the directors for approval by the General Meeting and, if applicable, whether this is updated and distributed appropriately within the Board; and, (iii) if your company has directors who exercise delegated or executive functions, check if the company has entered into a contract with the managing or executive director under the aforementioned terms.