1. What Are Related-Party Transactions (Operaciones Vinculadas)?

According to Article 18 of the Spanish Corporate Income Tax Act (LIS), related-party transactions arise whenever a company enters into transactions with persons or entities having a special relationship with it, such as:

- Shareholders or partners

- Directors and senior management

- Family members

- Group or sister companies

- Shareholding structures under common control

All such transactions, including shareholder remuneration, must always comply with the arm's length principle (valor de mercado). This means that the agreed terms must correspond to those that would have been agreed between independent third parties under comparable circumstances.

2. Why Shareholder Salaries Constitute Related-Party Transactions

Whenever a shareholder provides services to "their" company—whether as a managing director, executive or specialist—a related-party transaction automatically exists.

Consequently, the remuneration must be:

- at arm's length,

- agreed in advance,

- properly documented, and

- approved in accordance with corporate law.

3. Legal Requirements for Shareholder Remuneration

3.1 Arm's Length Principle (Article 18 LIS)

The remuneration must correspond to what an independent person would earn in a comparable position under similar market conditions.

3.2 No Gratuitous Payments (Article 15(e) LIS)

Unjustified, undocumented or arbitrary payments are regarded as non-deductible expenses for corporate tax purposes.

3.3 Documentation Requirements

Although simplified documentation rules apply to smaller businesses, companies should always be able to demonstrate that shareholder remuneration is commercially justified and was agreed in advance.

Typical supporting documentation includes:

- Employment or service agreement

- Description of duties and responsibilities

- Salary benchmarks or industry comparisons

- Shareholders' resolutions

- Payroll records and proof of payment

4. Is an Employment Agreement Required?

Spanish law does not require a written employment or service agreement, as oral agreements may also be legally valid.

However, from both a tax and corporate law perspective, written documentation is strongly recommended in order to clearly demonstrate the commercial justification of the shareholder's remuneration.

It is therefore advisable to document in writing:

- the shareholder's duties and responsibilities,

- the remuneration (fixed and variable components), and

- a shareholders' resolution (acta) approving or confirming the remuneration.

If such documentation is missing, the Spanish Tax Agency (AEAT) may classify the remuneration as insufficiently justified or as a gratuitous payment.

5. Variable Remuneration

Variable remuneration may be agreed, provided that the calculation method is objective, transparent and established in advance.

In practice, the relevant criteria (such as turnover targets, EBIT or performance indicators) should be documented in writing and confirmed annually at the shareholders' meeting.

Whether fixed or variable, shareholder remuneration should always be formally approved by a shareholders' resolution.

6. Practical Implementation: Annual Shareholders' Meeting and Documentation

At least once a year, the company should hold its Annual General Meeting (Junta General Ordinaria) in order to:

- approve the shareholder's remuneration,

- approve any bonuses,

- adopt any changes to the remuneration, and

- prepare the documentation required by the Spanish Tax Agency (AEAT).

Why is this important?

• The Spanish Companies Act (Articles 217–219 LSC) requires directors' remuneration to be duly approved.
• The AEAT generally accepts remuneration only if it has been approved in advance.
• Missing corporate resolutions frequently result in tax adjustments.

The minutes (acta) should include:

- Name of the shareholder/director

- Description of duties

- Fixed remuneration

- Variable remuneration and calculation method

- Effective date and duration

- Reference to the employment or service agreement

- Confirmation that the remuneration complies with the arm's length principle

This document is often the most important piece of evidence during a tax audit.

7. What Does "Reclassification as a Dividend Distribution" Mean?

If shareholder remuneration is insufficiently documented, lacks a valid commercial justification or does not comply with the arm's length principle, the Spanish Tax Agency (AEAT) may reclassify the payment for tax purposes and treat it differently from the way it was originally recorded in the company's accounts.

For the company, this means that the remuneration paid will no longer be recognised as a deductible business expense, thereby increasing the taxable profit and, consequently, the Corporate Income Tax liability. In addition, the payment may be classified as a distribution of equity (retribución de fondos propios), which is fully non-deductible under Article 15 of the Spanish Corporate Income Tax Act (LIS).

For the shareholder, such a reclassification also has important tax consequences. The payment will no longer be treated as employment income but instead as dividend income. This may also affect the shareholder's social security status and, in certain cases, lead to tax penalties under Articles 18 and 13 LIS, particularly where the required documentation for related-party transactions is missing or incomplete.

In short:
The remuneration is no longer recognised for tax purposes and the company permanently loses the tax deduction.

Further information on how to avoid tax risks when operating through companies can be found in our article Tax Evasion Through the Incorrect Use of Limited Liability Companies (S.L.).

8. Comparison with Germany: Differences in the Tax Treatment of Shareholder Remuneration

In Germany, the main tax concern generally relates to excessive shareholder remuneration, which may be treated as a hidden profit distribution (verdeckte Gewinnausschüttung).

In Spain, however, the risk profile is often the opposite.

Companies sometimes pay remuneration that is too low, which may be regarded by the AEAT as not being at arm's length. In such cases, the tax authorities frequently adjust the remuneration upwards to the market value. If private withdrawals or undocumented payments have also been made, these may additionally be reclassified as dividend distributions.

For this reason, it is generally recommended to establish remuneration that is both commercially justified and consistent with market conditions.

Article 18.6 LIS – Professional Shareholder Companies

Special rules apply to companies providing professional services (for example architects, lawyers or consultants):

1. At least 75% of the company's profits must be paid as remuneration to the professionally active shareholders.
2. The individual remuneration must amount to at least:
   1.5 × the average salary of comparable employees,
   or, where no comparable employees exist,
   5 × IPREM (Spain's public income indicator used for social benefits and subsidies).

These special rules do not apply to ordinary Spanish limited liability companies (S.L.).

Controlling Shareholders in Ordinary S.L. Companies

For controlling shareholders (for example, managing majority shareholders of a Spanish S.L.), Spanish law does not prescribe any statutory percentage or minimum remuneration.
However, it is strongly recommended that remuneration is commercially justified, properly documented and complies with the arm's length principle in order to minimise tax risks.