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expenses were unjustified and that the services were actually performed by the Russian office. In a similar case, Russia’s Higher Arbitration Court on January 20 quashed a RUB 260 million claim for back taxes against the Moscow branch of PricewaterhouseCoopers, according to media reports. The tax authorities had accused PwC of illegally deducting consulting service payments made to PwC’s Dutch branch, saying those services were actually performed by the Russian office. (For prior coverage, see Tax Notes Int’l, Apr. 21, 2008, p. 230, Doc 2008-8429, or2008 WTD 75-1.) Spain ♦ Kristen A. Parillo, Tax Analysts. E-mail: kparillo@tax.org Directors’ Remuneration Not Deductible, Supreme Court Says Spain’s Supreme Court recently issued two judgments denying corporate income tax deductions for the remuneration of directors of a public limited company (PLC). The November 13, 2008, judgments (2578/2004 and 3991/2004), which were only recently made public, have caused quite a debate. The Tax Inspectorate had initiated two separate proceedings against a PLC, claiming that the directors’ remuneration it had included as a deductible expense did not qualify. After exhausting all appeal procedures, the company brought its case to the Supreme Court, which also concluded that the directors’ remuneration was nondeductible. The company’s bylaws described the directors’ remuneration as ‘‘a fixed amount that could be reviewed annually, in addition to a share of the company’s profits in line with the limits laid down by legislation.’’ In its interpretation of the current Public Limited Companies Act and of section 13(ñ) of the Corporate Income Tax Act 1978 (now abrogated), the Court concluded that for the remuneration of the directors of a PLC to be tax deductible, the company bylaws must specify the directors’ remuneration ‘‘with certainty.’’ The remuneration will be considered certain if it meets the following conditions: (a) the bylaws must specify a definite earnings system and not contemplate several systems from which the board of directors can choose; (b) for variable earnings based on profit sharing, the bylaws must establish a definite percentage, and not a maximum percentage; and SPAIN (c) for fixed earnings, the bylaws must establish a definite amount, or alternatively, must establish criteria to calculate the exact amount without leaving scope for discretion. The Court’s conclusions, which appear to diverge from the current corporate income tax regulation, could have significant practical repercussions. The finding on fixed remuneration in point (c) is particularly controversial because the bylaws of many companies define directors’ remuneration as a fixed amount to be established every year by the general shareholders meeting. Points (a) and (b), on the other hand, reflect existing common practice: The bylaws must specify the earnings system, and, in the case of variable earnings, they must specify a definite percentage of profit sharing. Under the previous regulation on corporate income tax (section 13(ñ) of the Corporate Income Tax Act 1978) applicable to the fiscal years subject to the Supreme Court’s analysis, for an expense to qualify as tax deductible, it must be a mandatory expense and, therefore, necessary for the company to engage in its activity. The current regulation does not refer to those requirements. It states that an expense is considered tax deductible if the company enters it into its books and meets the conditions of the commercial regulation on directors’ remuneration. Thus, controversy may arise if the tax authorities rely on the Supreme Court’s judgments and not on the criteria of the Directorate General of Registries and Notarial Affairs (Dirección General de los Registros y del Notariado), concluding that companies that do not specify the remuneration amount in their bylaws are in breach of the commercial regulation. This would result in the remuneration of the directors not being tax deductible. This risk is limited to PLCs and does not extend to limited liability companies (the most common type of company in Spain). Under section 66.3 of the Limited Liability Companies Act, fixed remuneration ‘‘will be set every fiscal year by agreement of the shareholders general meeting.’’ The act itself thus prevents LLCs from establishing a definite amount in their bylaws, stating that the shareholders general meeting must set the amount annually. The Court’s judgments of November 2008 are especially relevant for listed PLCs. The Spanish tax authorities may consider that the remuneration those companies pay to their directors is nondeductible if their bylaws do not specify a definite remuneration amount, or alternatively, the criteria needed to calculate the exact amount without leaving scope for discretion. Therefore, it is important to pay close attention to how the TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 407 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
SPAIN tax authorities interpret the judgments in the context of the current wording of the Corporate Income Tax Act. Sweden ♦ Ana Martinez, senior tax associate, Cuatrecasas, Barcelona office, and Sonia Velasco, tax partner, Cuatrecasas, New York office Government Proposes to Defer Employee Tax Payments In the face of growing liquidity problems experienced by Swedish companies, the Swedish government on January 22 proposed allowing employers to defer paying employee taxes (arbetsgivaravgifter) for two months, according to a statement posted on the Swedish government’s website. Finance Minister Anders Borg and Enterprise Minister Maud Olofsson focused on corporate liquidity during a press conference in Stockholm, pointing out that current turmoil in global financial markets has made it increasingly difficult to arrange borrowing. Without the proposed tax deferral measure, they said, companies will soon find themselves short of cash needed to meet even minimal operating needs. The government has estimated that the proposal will cost about SEK 500 million (approximately $61 million). The employee tax deferral proposal follows a 1.7 percentage point corporate tax rate cut, from 28 percent to 26.3 percent, that took effect on January 1. The government announced the corporate tax cut in September. (For prior coverage, see Tax Notes Int’l, Sept. 22, 2008, p. 984, Doc 2008-19804, or2008 WTD 181-1.) The government is now referring the tax deferral plan to the Council on Legislation (Lagrådet), which will decide whether the proposal is legally valid. ♦ Randall Jackson, Tax Analysts. E-mail: rjackson@tax.org United States Drafters of Temporary Branch Regs Defend Rules’ Complexity Drafters of the recently issued section 954(d)(2) temporary branch rules on January 23 defended the complexity of the foreign base company sales income regulations issued a month earlier. (For the final and temporary contract manufacturing regulations (T.D. 9438), see Doc 2008-27115 or 2008 WTD 249-34; for accompanying proposed regulations (REG-150066-08), see Doc 2008-27116 or 2008 WTD 249-35.) ‘‘Complexity of business necessitates a complex rule,’’ Michael DiFronzo, IRS deputy associate chief counsel (international), said during a BNA Tax Management International Tax luncheon in Washington sponsored by Buchanan Ingersoll & Rooney. Itai Grinberg of Treasury’s Office of the International Tax Counsel said the most important evolution between proposed regulations (REG-124590-07) issued in February 2008 and the temporary regulations was the creation of a uniform rule on the location of manufacturing. (For REG-124590-07, see Doc 2008-4147 or 2008 WTD 40-31.) He told the group that the drafters made the change in response to commenter recommendations that suggested that the rules should not treat CFCs satisfying the physical manufacturing test differently from CFCs that satisfy the substantial contribution test. (For prior coverage, see Tax Notes Int’l, Jan. 26, 2009, p. 274, Doc 2009-756, or2009 WTD 9-1.) ‘‘The temporary regulations are concerned with the deflection of income to jurisdictions that fail the tax rate disparity test, not with the mere dispersion of activities,’’ Grinberg said. Asked about the complexity of the branch rules, Grinberg explained that while developing the rules officials decided to work from the preexisting branch rules and to address more complicated fact patterns to arrive at the temporary regulations. Herman Bouma, a tax attorney with Buchanan Ingersoll & Rooney, questioned the rules’ complexity, arguing that they could achieve the same outcome by comparing a CFC’s effective foreign tax rate for sales income and its effective foreign tax rate for manufacturing income to determine if there is a tax rate disparity. ‘‘We made a determination early on in the project not to open the tax rate disparity test question,’’ Di- Fronzo said. He also noted that current statutory provisions may prevent such a regulatory solution. During an earlier discussion of the final contract manufacturing rules, Jeffrey Mitchell, branch chief, IRS 408 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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