Companies receiving services may deduct expenses for employee incentives

The deductibility of personnel expenses within business group structures has been a subject of analysis by the Tax Administration. The focus of the issue lies in determining which entity is entitled to apply as a tax expense the cost derived from incentive plans for executives or managers.

What the DGT has ruled

The Dirección General de Tributos (DGT) has addressed the situation of two entities, X and Y, each of which has managers contracted by them. The core of the debate was whether the accounting expense recorded as personnel expense in the profit and loss account of the entity that actually receives the services of said professionals is tax-deductible for Corporate Income Tax (Impuesto sobre Sociedades), even when the actual payment of the incentives is made by the group's parent company.

After analyzing the Corporate Income Tax regulations (Law 27/2014), the binding body determines that the incentive expense is considered a tax-deductible expense in the entity receiving the services of the managers, provided that said expense is linked to the company's own economic activity and is necessary to obtain income.

What this means for you

This resolution has direct relevance for companies that are part of a tax group and apply incentive plans to retain talent. In structures where the parent or dominant company centralizes the payment of remuneration or incentives for the executives of its subsidiaries, the entity that actually uses the service and whose activity benefits from the management of those professionals is the one that must record and deduct the expense.

The criteria confirm that deductibility does not depend on who effectively disburses the money, but rather on the causal relationship between the expense and the activity of the entity receiving the professional service.

What should be done

Companies must ensure that accounting documentation and contracts clearly reflect the provision of services by the managers to the entity intending to deduct the expense. It is necessary for there to be a correspondence between the company's economic activity and the service received, ensuring that the incentive is linked to the objectives of the beneficiary entity to avoid contingencies in the Corporate Income Tax settlement.