Personal liability of management board members
Liability of management board members under the Penal Fiscal Code
Tax advisory, September 2020
When determining the obligations and risks associated with tax settlements in corporate entities, taxpayers generally focus on the technical aspects of accounting for typical business transactions, upcoming changes to tax regulations and the tax treatment of unique transactions, such as restructuring, mergers, etc. Considering the high number of amendments introduced into the tax law system and the authorities’ shifting lines of interpretation, companies may relegate the allocation of the responsibilities for fulfilment of the duties linked with tax settlements to the background. Nonetheless, if such responsibility is not properly allocated to specific individuals within the organization, management board members may be fully and exclusively accountable for the tax settlements of the company whenever any irregularities are detected.
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Article 9.3 of the Penal Fiscal Code (further called: ‘PFC’) prescribes that a person who, based on the provisions of law, a decision of a competent authority, contract or actual performance deals with the business matters, in particular financial matters of an individual, a legal person or an organizational unit with no legal personality, shall be held liable for fiscal offences or minor fiscal offences. Thus, as regards liability, PFC does not expressly stipulate that management board members are accountable for irregularities in tax settlements - instead, the person who actually deals with the tax settlements of the company, e.g.:
- the chief financial officer;
- the chief accountant;
- the person actually responsible for the calculation and payment of taxes,
may also be held liable.
As a result, if the company properly regulates the matter of responsibility for tax settlements, the accountability of its board members may be restricted. Nonetheless, in order to be able to determine the responsibility appropriately, the tax settlement issues must be formally arranged, i.e. the taxpayer should have in place the relevant tax settlement procedures and rules indicating what tax duties are performed by specific individuals within the organization. In addition, it is also useful to prepare a general tax procedure/ a procedure for determining responsibility for tax settlements which will clearly specify the allocation of responsibilities to individual persons involved in the organisation's tax affairs. Although business entities often have certain practical rules of procedure which they follow, determining the liability for tax settlements solely on the basis of the so-called 'good practices' may prove to be insufficient, especially in large or rapidly growing organizations where the duties that indirectly affect the correctness of fulfilling the tax law requirements may be highly dispersed.
What is more, even if the rules of procedure and regulations are in place, the liability of board members may be unrestricted anyway, because PFC also imposes penal fiscal liability for inadequate oversight. All the more so, organizations ought to make sure that their internal tax obligations are properly regulated and officially assigned to the individuals who are responsible for them.
According to Article 4.1 of PFC, fiscal offences/ minor fiscal offences are committed intentionally; they may be committed unintentionally only if the law so provides. Consequently, in order to attribute the liability to an individual based on PFC, as a rule, it must be evidenced that the individual’s actions have been intentional. Where the act is unintentional, the liability arises only if the relevant PFC provision expressly indicates that the specific act may be committed unintentionally for the liability to arise under PFC.
The intentional act occurs when the perpetrator intends to commit a prohibited act, i.e. wants to commit it or - foreseeing the possibility of committing it - agrees to it (which may be easier to prove in the case of persons professionally involved in financial / tax matters). In contrast, unintentional act occurs when the perpetrator who does not intend to commit the prohibited act, does so as a result of not acting with due caution required in specific circumstances, even though they have or could have anticipated the possibility of committing the prohibited act.
Hence, another benefit to be drawn from establishing appropriate tax procedures is the possibility to document that the taxpayer has exercised due diligence, which may prove useful when evidencing that any potential mistakes have actually been unintentional.
It needs to be pointed out here that Article 84 of PFC, which concerns inadequate oversight, directly refers to unintentional acts. Consequently, as regards penal fiscal liability, management board members may generally be held accountable for any potential deficiencies in their oversight of the duties linked with tax settlements performed by responsible persons, regardless of the provisions of the procedure.
Therefore, developing and implementing the relevant tax procedures should ensure transparency of the rules and permit the taxpayer to prove during any future proceedings conducted by tax authorities that potential errors or irregularities occur unintentionally, because where the employee acts in line with the procedure, they are unable to commit them intentionally. It must be stressed that recently, the tax authorities seem to attach more importance to the formally regulated and followed procedures not only when considering the matters covered by the penal fiscal law provisions but also when inspecting the correctness of tax settlements as part of their various other activities. As a consequence, it is highly recommended that steps should be taken to develop and implement the appropriate tax procedures.
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