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 his/her duties in the performance of his/her function (typically due diligence).

Tax authorities have previously applied liability for tax debts, for example, in relation to members of public companies. However, the liability of managing directors and other members of bodies is an exception. While members of a public company are unconditionally liable, in the case of members of bodies, the tax authorities must assess whether the member of the body caused the damage by breaching his or her duties.

Members of elected bodies are always obliged to act with the necessary loyalty, knowledge and care. The 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 checking his credibility. The managing director will then be liable to the company for damages and, if he fails to pay them, will be liable to the extent of the unpaid damages to the company's other creditors.

However, 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 exercise 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 not 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 held that liability arises by the very fact of the tax office's call. However, the tax office cannot issue such a notice after the company's claim for damages for breach of due care has become time-barred. The statute of limitations is usually three years after the company became aware of the damage, but no later than 10 years after the damage occurred.

It is likely that the police and other law enforcement authorities will also assist tax administrators in their detective work. If a court in criminal proceedings decides that the taxpayer is guilty in connection with a breach of duty in the management of foreign property, such a decision can be taken over by the tax office without further delay and used as a basis for liability. It can be expected that the tax authorities will now turn more frequently to the police to investigate suspicious cases. Members of company bodies will then not only face criminal sanctions but also tax execution for debts that are not even theirs.

Managing directors, and indeed all elected directors, can be advised to be more than ever mindful of their duties and at the same time be prepared to explain and demonstrate why their actions were informed, diligent, and in the best interests of the company.

[1] Full text of the decision available online:

‍https://vyhledavac.nssoud.cz/DokumentOriginal/Html/722330

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