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Spain: Tax implications of ‘malus’ and ‘clawback’ clauses in variable compensation schemes

Importance of compensation issues from the corporate governance angle has increased over recent years, as a result of which their regulation has gone from mere recommendations to positive law, applicable to the compensation paid to the executives and directors of, among others, credit institutions, investment services and insurance companies, or collective investment undertaking management companies.

Generally speaking, the objective of rules of this kind is to align the design of variable compensation schemes with the long-term sustainability of companies, by preventing excessive risk-taking and the conflicts that can arise between the interests of owners, or shareholders, and managers, or executives.

The measures envisaged in these regulations include mechanisms for the adjustment of short and long-term variable compensation, once fulfilment of the objectives to which such compensation was linked has been determined (ex post adjustments). The most notable of such mechanisms are:

  • Deferral of the payment of variable compensation;
  • Settlement through the transfer of equity instruments;
  • The establishing of "lock-up" periods; and
  • The possibility of the compensation eventually going unpaid, or of its reimbursement being requested, in the event of materialisation of certain circumstances that could call into question the validity of such payments.

This last category of adjustment mechanisms linked to the reduction or recovery of variable compensation are known as 'malus' (reduction) and 'clawback' (refund) clauses.

Without prejudice to the juridical complexity associated with the application of clauses of this kind, they give rise to a variety of tax questions affecting employer companies, employees and executives, and which are generally difficult to answer. Some of these questions are the following:

  • Timing of recognition of variable compensation affected by malus or clawback clauses.The impact in the case of malus clauses is very different from that deriving from clawback clauses.In the case of the former, the variable compensation has been determined but not yet paid (usually because there is a deferral arrangement), and in most cases has therefore not yet fallen due. In the case of clawback clauses, however, the compensation has been paid, the employer has applied and paid in the corresponding withholdings and prepayments, and the employee or executive has filed his or her personal income tax return.
  • Variable compensation affected by the application of clawback clauses.In cases in which the variable compensation has been paid through the transfer of shares of the employer company, it is necessary to determine whether such clauses affect the number of shares transferred or their economic value.The reply to this question could be affected by a possible fluctuation in the value of the share between the transfer date and the date on which the variable compensation is refunded.
  • Effect of clawback clauses on the gross amount of variable compensation.None of the Spanish rules regulating the application of clawback clauses stipulates clearly whether the amount refunded should be the gross amount of the compensation paid or its net amount.It would seem reasonable to conclude that the application of clawback clauses should entail the refund of taxes incorrectly paid in, and this question is therefore crucial when it comes to determining whether it is the employer – as the party under an autonomous obligation to withhold the tax – or the employer themselves who is entitled to request a possible refund of the taxes paid in.

Finally, from an international perspective, according to the commentary on the OECD Model Convention of July 2014, earned income deriving from deferred compensation arrangements is considered to be among the types of income regulated by Article 15, meaning that it may relate to a previous job position held in another country. The impact that malus and clawback clauses would have in such cases would therefore need to be analysed in order to determine, accordingly, the state from which a refund of taxes incorrectly paid in should be claimed.

Therefore, the tax questions related to this matter mainly derive from the absence of a tax specific regulation, and are linked, among others, to determining:

  • The fiscal year when the personal income or corporate income taxes have been generated and computed;
  • The person entitled to claim the eventual personal income tax refund (the employer or the employee);
  • The amount to be claimed (gross or net income);
  • The income affected by these rules when variable compensation has been liquidated by delivering shares; and
  • The way these topics should be addressed when the employee has been rendering services in different jurisdictions (i.e. expatriates or international assignment programmes).
Eduardo Gómez de SalazarRafael García-Valdecasas

Eduardo Gómez de Salazar ( and Rafael García-Valdecasas (, Madrid

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