In June 2024[1], the Supreme Administrative Court confirmed the possibility for tax administrators (tax authorities) to apply liability for tax debts of companies in relation to members of their elected bodies (managing directors, members of the board of directors and supervisory boards, general partners). Liability can be applied by tax administrators in the event that the company fails to pay the tax debt itself and the member of the body has caused damage by breaching their duties during the performance of their function (typically due diligence).
Tax administrators have previously applied liability for tax debts, for example, in relation to partners of public limited companies. However, the liability of managing directors and other members of bodies is an exception. While partners in a public limited company are unconditionally liable, in the case of members of bodies, the tax administrator must assess whether the member of the body caused the damage by breaching their duties.
Members of elected bodies are always obliged to act with the necessary loyalty, knowledge, and care. A managing director of a popular company may breach such duties, for example, by ordering goods on behalf of the company in large volumes from a supplier with numerous enforcement records without first verifying their credibility. The managing director will then be liable to the company for damages, and if they fail to pay them, they will be liable for the unpaid damages to the company’s other creditors.
Members of the boards of companies that have fallen into financial difficulties due to unfortunate circumstances should not, in principle, fear the consequences of liability (provided they perform their functions with due care). On the other hand, the question of compliance with the duties of directors will not be judged by an independent and impartial civil court, but by an official of the tax authority. In such a situation, it is naturally appropriate to ask whether such an allocation of power is more conducive to maximizing the state’s tax revenue than to an objective and fair assessment of the situation.
At the same time, the Supreme Administrative Court has concluded that liability arises simply by the very fact of the tax office’s call. However, the tax office cannot issue such a notice once the company’s claim for damages for breach of due diligence has become time-barred. The statute of limitations is typically three years after the company became aware of the damage, but no later than 10 years after the damage occurred.
It is likely that tax administrators will be assisted in their investigative work by the police and other law enforcement authorities. If a court in criminal proceedings finds the taxpayer guilty in connection with a breach of duty in managing foreign property, such a decision can be adopted by the tax office without further delay and used as a basis for liability. It can be expected that tax authorities will now more frequently turn to the police to investigate suspicious cases. Members of company bodies will then face not only criminal sanctions but also tax enforcement for debts that are not even theirs.
Managing directors, and indeed all elected members of boards, are advised to be more mindful of their duties than ever before and to be prepared to explain and demonstrate why their actions were informed, diligent, and in the best interests of the company.
[1] The full text of the decision is available online:
