Director’s Remuneration in a Spanish Private Limited Company

Properly structuring director remuneration is essential to avoid conflicts with the tax authorities and shareholders, and to ensure transparent and lawful corporate governance. The remuneration regime must be clearly defined in the company’s articles of association, and the maximum annual amount must be formally approved by the general meeting. This is the only way to ensure that the payment is deductible for corporate income tax purposes and compliant with commercial law.

Many business owners are unaware that paying a director’s salary without following this procedure may be treated as a non-deductible gratuitous payment, with significant financial and legal consequences.

The question of how much a director should earn must also be addressed from a legal and market-based perspective. It is not merely about assigning a number, but about justifying the amount based on the level of responsibility, the size of the company, and alignment with market standards, always within the limits approved by the general meeting. It is also essential to apply the correct income tax withholding to avoid problems with the tax authority and ensure the process is legally sound.

What does a company director do?

A company director is responsible for the management and legal representation of the business. This includes signing contracts, representing the company before public authorities, and ensuring full legal compliance. The director plays a central role in guiding the strategic direction of the company and overseeing its daily operations.

This position entails not only leadership but also significant legal and financial liability. In cases of mismanagement or legal breaches, the director’s personal assets may be at risk. The position may be unpaid or remunerated, but if the remunerated nature of the role is not expressly set out in the company’s articles, any payment will be invalid under commercial law and non-deductible for tax purposes.

Types of governance structures in a private limited company

A private limited company in Spain may be managed under various governance models:

• Sole director: One person holds all management and decision-making powers. This is the most common model for small businesses.
• Joint and several directors: Two or more directors may each act independently on behalf of the company.
• Joint directors (acting jointly): Two or more directors must act together to bind the company, increasing internal control but slowing down operations.
• Board of directors: A collegiate body with at least three members, which makes decisions by majority and may delegate executive functions to one or more managing directors.

Each model has different implications for decision-making and director remuneration, which must always comply with the articles of association and resolutions of the general meeting.

How much does a director earn?

There is no standard answer. The director’s remuneration depends on the company’s size, the scope of responsibilities, the time commitment required, and — most importantly — what is provided in the articles and approved by the shareholders.

The amount must be reasonable and proportionate to the responsibilities and the company’s financial situation.

Special attention must be given to retired directors. In general, receiving remuneration for an active directorship is incompatible with claiming a retirement pension, except in limited situations such as “active retirement.” A prior legal analysis is essential to avoid losing pension entitlements or incurring penalties.

How should director remuneration be structured?

This is one of the most complex and error-prone areas. Director remuneration is not a matter of free choice; it is subject to legal and judicial requirements.

1. The “link theory”: always a commercial relationship

When a person is appointed as a company director, their relationship with the company is legally considered commercial, not employment-based. If the same person also performs executive or managerial functions, Spanish case law (the “link theory”) considers that the commercial relationship overrides and absorbs any employment relationship.

Practical effect: All payments received, whether for directorship or management functions, are treated as director remuneration and must follow commercial law requirements. It is not legally valid to receive a salary under an employment contract for managerial duties while also being paid separately as a director.

2. Tax and social security treatment

• Income tax (IRPF): The director’s remuneration is subject to a flat-rate withholding: generally 35%, or 19% for companies with a turnover under €100,000 in the previous year.
• Social security: A director who exercises effective control and management of the company (often through shareholding) must be registered under the self-employed social security regime.
• No invoicing allowed: A director cannot invoice the company for their management or executive services. This practice is considered irregular by the tax authorities.

Articles of association and legal requirements

Two key conditions must be met for director remuneration to be valid and tax-deductible:

• Articles provision: The articles of association must clearly state that the role is remunerated and specify the method of remuneration. Generic or vague clauses are not sufficient.
• Shareholder approval: The general meeting must approve, each year, the maximum total amount that the company may pay to its directors. Without this resolution, any payment may be classified as a non-deductible gratuitous benefit.

How to check if someone is a company director

The official way to confirm whether a person is a registered director is to request a company extract from the Companies Registry in the province where the company is domiciled. For the appointment to have legal effect against third parties, it must be properly registered.

The appointment should also appear in the company’s incorporation deed or in the minutes of a shareholders’ meeting. This is especially important since, as noted above, directors can face personal and even unlimited liability in certain situations.

Conclusion

Director remuneration is a key element of corporate governance. Ensuring transparency, strict compliance with the company’s articles and shareholder resolutions, and proper structuring under commercial law is critical — not only for legal and tax validity, but also for the company’s financial integrity and professional standards.

In today’s increasingly regulated environment, it is essential to understand the applicable tax and social security rules, as well as the personal liability directors may face. Early legal advice is the best way to avoid penalties, protect the director, and strengthen the legal and financial health of the company.

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