Supreme Court requests a preliminary ruling on directors' liability

Dutch version

Directors’ liability

Under certain circumstances directors of legal entities subject to corporate income tax are jointly and severally liable for certain tax liabilities of that legal entity, including payroll tax, VAT, excise duty, consumption taxes and environmental taxes. Key to determining such liability is the obligation to notify. As soon as a legal entity is no longer able to pay any of the mentioned taxes, a notification must be made to the tax authorities. This notification can be made by any of the directors and must be made no later than 14 days after the tax due should have been paid. A prompt notification of the entity’s inability to pay is also valid for other taxes and subsequent tax periods, but not for additional tax assessments imposed for understated tax on a return. For this, inability to pay can only be validly notified if there is no intention or gross negligence on the part of the legal entity.

If the notification of inability to pay is made in a timely and legally valid manner, a director is only liable if the Tax Administration demonstrates that the non-payment of the tax debt is due to their manifestly improper management during a period of three years preceding the time of notification. This burden of proof is not easy to comply with. It should concern a situation in which no reasonable thinking director would have acted similarly under the same circumstances. On top of that, the director should have ‘serious personal blame’ (ernstig persoonlijk verwijt).

If the obligation to notify has not been complied with, however, the situation is quite different. In that case, there is a legal presumption that the director is to blame for the unpaid tax debts. Moreover, the director may only provide rebuttal evidence if they first demonstrate that they cannot be blamed for the non-compliance with the obligation to notify.

Principle of proportionality under national law

A recent Supreme Court judgment focused on whether the latter scheme (Section 36(4) of the Dutch Collection of State Taxes Act 1990 [IW 1990]) violates the principle of proportionality. In that case, The Court of Appeal of The Hague had found that the director had acted in good faith and had done the maximum that could be required to save the company under difficult circumstances that had arisen beyond their control. Despite this, the director was held liable for the unpaid payroll tax and VAT, because they failed to promptly notify their inability to pay and were therefore to blame. This judgment was appealed in cassation on behalf of the director.

The Supreme Court found that the national law principle of proportionality could not be applied in this case, as the Tax Administration did not have any discretionary power to deviate from the statutory directors' liability scheme and the allocation of the burden of proof it provides for. Nor are there any special circumstances that were not considered by the legislator and have the effect of bringing the statutory provision into conflict with general principles of law to such an extent that its application should be omitted.

Principle of proportionality under EU law

However, the Supreme Court doubts whether the allocation of the burden of proof laid down in Section 36(4) of the Collection of State Taxes Act 1990 is in line with the EU law principle of proportionality, as it is virtually impossible for a director to avoid liability for VAT due in the event of a failure to promptly notify insolvency. The Supreme Court deduces from case-law of the Court of Justice of the European Union (CJEU) that while Member States may take measures to protect their treasury as effectively as possible, a system that amounts to unconditional liability for another person's tax liability goes too far. According to the CJEU, the decision on liability should take into account (I) whether a director has acted in good faith by acting with the diligence of a prudent businessman, (II) whether that person has done everything reasonably practicable, and (III) whether their involvement in fraud or abuse has been ruled out.

The Supreme Court questions whether the exclusion of rebuttal evidence in case of non-compliance with the obligation to notify is in line with the aforementioned case law and decides to request for a preliminary ruling on the compatibility of Section 36(4) of the Collection of State Taxes Act 1990 with EU law. Further proceedings in the case are stayed until the questions are answered.

Source: HR 6 oktober 2023, 21/03566, ECLI:NL:HR:2023:1371