On numerous occasions the Estonian courts have had to solve disputes where the Estonian Tax and Customs Board requires the company’s tax arrears in Estonia to be paid by the members of the board personally. Today the Estonian Supreme Court’s practice in these disputes is quite substantial and allows to make conclusions about the meaning of the legislation and the Tax Board’s interpretations.
The right to require the payment of tax arrears from the management in certain cases i.e. to make a liability decision is given by the Taxation Act, which prescribes the member of the board’s obligation to ensure the timely and full compliance with the monetary and non-monetary obligations arising from the company taxation law.
Monetary obligations are foremost the timely payment of the company’s taxes. Non-monetary obligations are foremost the tax declaration obligation and registration obligation (e.g. as a VAT payer ), but also the obligation to retain documents and the obligation to assist in tax proceedings.
Failing to comply with the specified obligations or unsatisfactory performance thereof may bring about the making of a liability decision for the board member. But solely the fact of failure to perform obligations is not sufficient for the recovery of the company’s tax arrears from a member of the board. All of the following requirements must be fulfilled:
The board member must be guilty of the breach of obligations
The types of guilt are carelessness, gross negligence and intent. Negligence does not bring about the board member’s liability. When defining the types of quilt the Supreme Court has ruled that on the basis of the Taxation Act, intent can be found where the board member understands that he breaches the obligations specified in the Taxation Act with his act or failure to act.
The board member’s liability is individual. Therefore it is possible that a board member is not guilty of the breach of obligations at all and is not responsible for the company’s tax arrears or the board members’ types of quilt are different and arising from that the amount of liability is different.
However it must be noted that the board member cannot delegate his obligations arising from the law and thereby avoid liability. Neither board members’ mutual agreements about the division of obligations nor contracts between the management and shareholders shall give grounds for exemption from liability in case of breach of obligations provided by law.
The board member is also not released from liability solely for the reason that the tax arrears arose before him being assigned as a member of the board. If intent or gross negligence is identified in the board member’s activity, then he is liable for the company’s tax arrears regardless of the time of the arrears arising or whether on the basis of the company’s internal agreements the board member did or did not have to perform the obligations specified in the Taxation Act.
The burden of proof lies on the tax authority.
The board member must have breached obligations arising from taxation laws
The Supreme Court has found that the liability decision can only be made for a breach of the Taxation Act, not for the breach of the board member’s obligations arising from the Commercial Code or other legislation.
The board member is not obligated to prefer the tax claim to the claims of other creditors. When performing its obligations the board member must foremost follow the interests of the company. Therefore situations may arise where it is necessary for the company to pay other obligations before the tax arrears to avoid further and greater losses. However in case of the existence of tax arrears the board member must pay special attention to compliance with taxation legislation, incl. comply with the assistance obligation and express a will to pay the tax arrears at the first opportunity.
There must be a causal link between the breach of obligations and the tax arrears
The board member’s act or failure to act must be directly related to the arising of the tax arrears. If the board member has complied with all obligations and the tax arrears have arisen due to other circumstances, e.g. due to wrongly assessed commercial risks or in case the tax arrears have arisen before the unlawful act by the board member took place , the board member is not liable for the paying of such tax arrears.
If the company has several board members, they are jointly and severally liable for the tax arrears, which means that the tax arrears can be collected from each of them. Each board member’s liability however depends on his guilt and type of quilt. Each board member’s guilt must be proved separately and the liability decision can be made only against such a board member in whose activity a breach of the Taxation Act is identified. It must be remembered that even if a division of obligations between the board members exists in the company internally, the board member is not released from liability for the breach of obligations provided in the law.
The Taxation Act establishes that the liability decision can only be made after a collection of tax arrears has been started in relation to the company and as a result of it the debt has not been paid within three months or if the company has been declared bankrupt.
The liability decision can only be made in relation to valid tax arrears of a company with legal capacity. The basis for the end of tax liability is the extinguishment of the legal person’s legal capacity i.e. deletion from the commercial register. The Supreme Court has ruled that if the tax authority wants to collect the tax arrears from the management, the liability decision must be made before deleting the company from the register. However f the liability decision is issued before deleting the company from the register, the decision will remain in force in relation to the board member after deleting the company from the register.
In conclusion it must be said that the legislation in force in Estonia allows for the company’s tax arrears to be claimed from the board member personally, if the Tax Board has identified the board member’s liability for the tax arrears and it has not been possible to collect the debt from the company. If there are several members on the board, each board member’s liability for breach of taxation legislation is assessed individually and the board member who has performed the obligations appropriately is not liable for the payment of the tax arrears. Only current tax arrears can be collected from the management, i.e. the company cannot be deleted from the register by the time of issuing the liability decision.
