Directors’ remuneration: key legal considerations and risks
The remuneration of company directors is a recurring issue in Spanish corporate law, owing to the constant evolution it has undergone as a result of the various interpretations adopted by the Supreme Court.
For unlisted companies, which constitute the majority of the Spanish business fabric, the existence of an improperly structured remuneration system may give rise to significant risks.
As a result of defective structuring, the following issues may arise:
- Invalidity of corporate resolutions.
- Liability Actions against Directors
- Employment Disputes
- Significant Tax Liabilities
Conversely, an appropriately structured framework enables the alignment of incentives, the attraction of executive talent, and the strengthening of corporate stability.
Directors’ remuneration: legal requirements to be observed
Since the well-known judgment of 26 February 2018 delivered by the Civil Chamber of the Supreme Court, the interpretation of the company law regime governing directors’ remuneration has been clearly defined.
The general rule is that the office of director is unpaid, unless the articles of association provide otherwise. If it is intended that directors be remunerated, three essential requirements must be satisfied:
- Statutory provision: the articles of association must expressly set out the remuneration system or systems, both for executive and non-executive directors.
- Annual cap approved by the general meeting: the general meeting must determine the maximum aggregate annual remuneration payable to the directors as a whole.
- Contract with executive directors: where there is a board of directors and executive directors have been appointed, they must enter into a contract with the company, approved by a two-thirds majority of the board, setting out in detail all components of the remuneration attributable to their executive functions.
As regards remuneration structures, various forms may be adopted: fixed remuneration, profit participation, variable remuneration, pension schemes, insurance arrangements, attendance fees, or termination payments.
However, the law imposes a limitation: remuneration must be proportionate to the company’s significance, its financial position and prevailing market standards.
Directors’ remuneration and its deductibility for Corporate Tax purposes
Historically, the Tax Authorities denied the deductibility, for Corporate Tax purposes, of directors’ remuneration where the applicable company law requirements had not been complied with.
Accordingly, companies that remunerated their executive directors without having formalised the requisite contract, as mandated by law, found that the Tax Authorities disallowed the deductions claimed in respect of the remuneration paid. Likewise, the absence of an appropriate provision in the articles of association entailed the inability to deduct such remuneration.
However, several recent judgments of the Third Chamber of the Supreme Court have introduced significant developments. The new line of authority establishes that, where the remuneration corresponds to genuine and effective services, duly substantiated and recorded in the accounts, it cannot automatically be characterised as a gratuitous payment or as expenditure contrary to law for the purpose of denying its deductibility.
That said, although this line of authority introduces a degree of flexibility, it does not eliminate the associated risks. The Tax Authorities continue to scrutinise these items closely, and any documentary deficiencies or inconsistencies between the articles of association, corporate resolutions and contractual arrangements may give rise to significant tax adjustments.
The key lies in acting proactively, by reviewing each company’s corporate position and rectifying any matters that are not properly regulated and formalised before any potential tax inspection.
Directors’ remuneration and the continuing applicability of the “Link Theory”
Beyond the issue of tax deductibility, the question remains as regards directors who perform executive functions and simultaneously hold their corporate office alongside a special senior management employment contract.
The traditional “double link theory”, developed in labour case law, maintains that the corporate relationship prevails over and absorbs the employment relationship. Consequently, remuneration agreed under senior management contracts would only be valid, and tax-deductible, if it complies with the requirements of the company law regime.
In the tax sphere, the new line of authority of the Supreme Court, drawing upon the case law of the Court of Justice of the European Union, has adopted a more flexible approach. It now permits the deduction of remuneration paid to managing directors under senior management contracts who also serve as non-executive board members, provided that there is a genuine and effective provision of services.
However, in the labour and company law spheres, the doctrine has not disappeared. The Order of 25 November 2025 delivered by the Special Chamber for Jurisdictional Conflicts of the Tribunal Supremo has confirmed the continuing applicability of the “link theory”, attributing jurisdiction to the Commercial Courts. The Supreme Court has rejected the argument that European case law displaces its application in the domestic sphere where the director exercises control over the company’s management.
Accordingly, it is essential to structure properly the relationship between the director and the company, having due regard to the applicable statutory provisions and legal requirements.
Directors’ remuneration and the criteria of reasonableness
It is equally important to consider the practical application of the criteria of reasonableness set out in Article 217.4 of the Companies Act (Ley de Sociedades de Capital).
The courts are using these parameters as a constraint on the freedom to determine remuneration. Their infringement is giving rise to:
- Judgments upholding challenges to corporate resolutions on the grounds of excessive or disproportionate remuneration.
- Corporate liability actions requiring directors to repay sums unduly received.
Directors’ remuneration is not merely a formal matter, but a critical issue of corporate governance, taxation and corporate stability. An appropriately structured framework safeguards the company, its shareholders and its directors.
At Devesa, our experience shows that disputes relating to directors’ remuneration can be avoided through proper preventive planning, based on:
- Careful drafting of the articles of association and a clear definition of the remuneration systems.
- Proper determination of the annual cap by the general meeting.
- Preparation of executive directors’ service agreements.
- Periodic review in light of developments in case law.
- Coordination across company, tax and employment law matters.
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