New system of retribution for directors in Spain

The retribution for directors was one of the main reforms of the Law on Capital Companies (LSC) introduced by Law 31/2014 of 3rd December 2014, which modified the LSC to improve corporate governance.

One of the main reforms is the distinction between two classes of remuneration.

The remunerations to directors “acting in their capacity as directors

Article 217 of the LSC regulates this remuneration. It is subject to the statutory reserve and the approval of the board, which must also decide the maximum number of administrators of the company, while considering the company’s importance and economic situation, as well as the market standard of comparable companies.

Unless the board decides otherwise, the administrators will decide whether to allocate retribution and to which board of directors.. The directors must consider the functions and responsibilities attributed to each. Additionally, the directors must determine specific retribution systems, so that under no circumstances is the decision left to the will of the board, or an option between the different retributive systems, which can be cumulative but not alternative.

Another development with the reform is the elimination of the requirement for Limited Liability Companies to convene a board meeting every fiscal year in order to set the retribution for the directors, thus maintaining the amount decided by the board unless the board itself changes it.

It is essential that the company’s bylaws include directors’ remuneration so that the accounting expenses deriving from such compensation is tax deductible from Corporate tax (in this sense, the Supreme Court rulings on 21st February 2013 and 26th September 2013 confirming that in the absence of statutory guidance, the retribution received by an administrator is a gratuitous compensation and therefore not tax deductible).

The Remuneration for “performing executive functions”

This remuneration must be reflected (extra-statutory) in a contract signed by the board of directors and the affected director. A two-thirds majority from the board must approve the contract and the affected director is unable to partake in the deliberations or the voting. Additionally, the contract must detail all items for which retribution for the performance of executive functions can be obtained including, where applicable, the eventual compensation for early retirement and the amounts payable by the company regarding insurance premiums or contribution to saving systems. The director will be unable to claim retribution for performing any executive functions where the amounts or concepts are unforeseen in the contract. Therefore, it is important to expressly state in the bylaws the possible division of retribution for directors with executive functions.

If you need additional information regarding directors retribution in Spain,

Please note that this article is not intended to provide legal advice.

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