In more detail

Spanish tax residents are entitled to an exemption of up to EUR 60,100 per year in their tax return for employment carried out outside Spain if the following conditions are met:

• The work must be carried out physically abroad.
• The employment must be carried out for a company not resident in Spanish territory or a permanent establishment located abroad. For related entities, proof will be required that such work produces or can produce an advantage to the recipient entity. This is understood as providing a direct benefit or added value to the foreign company. 
• In the country where the work is performed, there must be an identical or similar tax to the Spanish PIT. This requirement is met if there is a Double Tax Treaty that includes a clause of information exchange signed between both countries. This exemption cannot be applied, however, if the country of destination is classed as a tax haven.

Background

The Spanish Tax Authorities ruled that the salary income received by directors cannot benefit from certain incentives that the PIT Law allows, as these are only applicable to those who have an employment or statutory relationship. This is one of the conclusions reached in relation to the exemption for work performed abroad.

In previous judgments, the Supreme Court has also concluded that the expression "employment income for work actually carried out abroad" contained in article 7p of the PIT Law cannot be applied to income received for participating in board meetings at nonresident entities (i.e., the foreign subsidiary). Therefore, the exemption cannot be applied in such cases due to the lack of proof of the added value generated for the foreign subsidiary. However, the Supreme Court did not analyze different cases such as the provision of other services by directors to foreign subsidiaries.  

Case analysis

1. Tax audit

• The tax audit considered that the remuneration paid to two directors for their work abroad (specifically, executive and management work) could not be exempted by virtue of article 7p of the PIT Law as this exemption only covers those who have an employment relationship.
• The company appealed the tax audit’s decision before the TEAC, which upheld the tax audit's criteria, basing its resolution on the sole reason that the two directors were members of the board of directors.

2. National Court judgment dated 19 February 2020

• The company appealed TEAC's resolution before the National Court. The National Court ruled in favor of the company, basing its argument on the fact that article 7p of the PIT Law by itself does not specify or differentiate between employment income by its nature and by its legal provision (i.e., the remuneration of directors).  Therefore, there is no legal basis to sustain the restriction imposed by the tax audit and confirmed by the TEAC. 

• However, one of the members of the court had an opinion that differs from the criteria of the ruling. They argued that this exemption is not applicable to all employment income and that the stipulation in article 7p of the PIT Law only refers to employment income derived from a labor or statutory relationship, starting from the condition of an employee. Therefore, it is not applicable to directors. 

3. Supreme Court Judgment dated 20 June 2022 – relevant criteria

• The Supreme Court has ruled that directors can benefit from this exemption due to the wording of the PIT Law. Although the exemptions must be interpreted strictly, this cannot produce an outcome contrary to the law and to the objectives of these benefits.
• The Supreme Court has concluded that the remuneration received by the directors and members of the board of directors of a company can benefit from the exemption provided that all the requirements stated by the PIT Law are fulfilled. In the case under analysis, the remuneration perceived by the directors was for executive and management functions, and therefore should be considered as employment income.
• The Supreme Court concluded that the case at hand is substantially different from previous cases by referring to previous Supreme Court judgments denying the application of the exemption to director's income. In particular, the Supreme Court concluded that the key element is the activity performed abroad by such directors and the added value for the foreign entity. In our opinion, if the activities carried out by the directors fall under the responsibilities of a manager (e.g., supervising sales, costs and personnel, monitoring customers, supervising purchases and stock, etc.), the exemption can be applied because the income received for these functions qualified for the exemption. However, in cases where the services provided by directors abroad exclusively derive from the participation in board meetings at nonresident entities (i.e., from management intrinsic to sitting on a board of directors), the exemption should be denied because of a lack of added value generated for the foreign entity.