A Crucial Development in Cases Concerning the Personal Liability of Board Members

Recently, the Court of Justice of the European Union assessed a significant issue in connection with the application of the tax debt recovery procedure against board members for the unpaid tax debts of the commercial companies they managed.

The Regulatory Framework in Force in Latvia

In Latvia, a board member may be held personally liable for a commercial company’s tax debt if five preconditions are met simultaneously:

1. the tax debt exceeds 50 minimum monthly salaries (in 2024 – EUR 35,000);
2. the commercial company has been notified of the compulsory recovery of overdue taxes;
3. after the commencement of a tax audit (or after a decision to initiate a tax audit), the commercial company’s assets are alienated or overdue taxes are not fully paid;
4. a statement of impossibility of recovery has been drawn up, meaning the commercial company has no assets against which recovery can be directed;
5. the commercial company has failed to fulfil its obligation to submit an insolvency petition.

Latvia is Not the Only Country with Such Regulation

Latvia is not the only Member State of the European Union where, in certain cases, a commercial company’s tax debts can be recovered jointly and severally from a board member during whose term of office such a tax debt arose. Similar regulations exist in Luxembourg, the Netherlands, and Bulgaria (and possibly other countries), and the compliance of such regulations with European Union law is increasingly being assessed by the Court of Justice of the European Union.

The Court of Justice of the European Union has repeatedly indicated that regulations allowing for the joint and several recovery of commercial companies’ tax debts from board members comply with European Union law, provided that they do not create a situation where a board member is held liable irrespective of their fault.

Namely:

1. the board member’s liability cannot be automatic solely due to their status;
2. a causal link must exist between the board member’s action or inaction and the incurred tax debt;
3. the board member must be able to invoke all factual circumstances demonstrating that the recoverable tax debt did not arise due to their fault;
4. the extent of liability must be related to the reduction in assets caused by the board member’s actions. Liability may also include late payment interest if it is an integral part of the tax debt and the principle of proportionality has been observed.

However, in the recently examined case, the question was also assessed as to whether a board member, from whom the State Revenue Service (SRS) wishes to recover a commercial company’s tax debt jointly and severally, has the right to:

1. independently challenge the SRS decision by which additional taxes payable to the budget were assessed against the commercial company (not personally against the board member);
2. challenge this SRS decision even if it has already entered into force and is no longer subject to appeal.

To facilitate understanding of this issue, let us examine the factual circumstances of the case.

Factual Circumstances of the Case

As a result of an SRS tax audit, additional taxes payable to the budget were assessed against a commercial company (hereinafter referred to as AAA).

The commercial company missed the deadline for challenging the SRS decision, consequently rendering it final and no longer subject to appeal. As the commercial company lacked the funds to pay the additionally assessed taxes, a tax debt arose.

After some time, the SRS initiated a tax debt recovery procedure against the commercial company’s board member and demanded that they pay the commercial company’s tax debt.

The board member decided to challenge the SRS decision by which the relevant tax debt had been assessed against the commercial company. However, both the SRS and the courts did not recognise this possibility, stating that:

1. the board member was not the addressee of the relevant SRS decision, as the additional taxes were assessed against the commercial company. Consequently, only the commercial company had the right to challenge this decision. Furthermore, the board member is not the taxpayer concerned, therefore the SRS was not obliged to address this decision to them as well;
2. the SRS decision had already entered into force and was no longer subject to appeal;
3. the board member was the person who represented the commercial company during the tax audit, and therefore had the opportunity to exercise the right to challenge the SRS decision on behalf of the commercial company, but failed to do so.

Assessment by the Court of Justice of the European Union

The dispute reached the Court of Justice of the European Union, which arrived at different conclusions.

Firstly, the Court indicated that the finality of an administrative decision serves to ensure legal certainty, and therefore, in principle, the SRS is not obliged to review a decision that has entered into force. However, this does not apply to situations where the board member is effectively denied the right to effectively challenge the facts established by the SRS decision in the procedure initiated against them. Such a restriction infringes upon the board member’s right to defence.

Secondly, the Court recognised that in a tax debt recovery procedure, the SRS decision by which additional taxes were assessed against the commercial company constitutes evidence that the board member must be able to challenge. Furthermore, this right cannot depend on whether they previously had the opportunity to challenge this decision on behalf of the commercial company.

Thirdly, the board member’s right to subsequently challenge the SRS decision addressed to the commercial company does not affect the finality and binding force of that decision with respect to the commercial company itself.

Fourthly, the board member must have access not only to the grounds for the decision taken against them but also to all case materials on which the institution based its decision, so that they can effectively express their opinion on these circumstances.

More precisely, neither the SRS nor the court can refuse to assess all evidence, including the SRS decision addressed to the commercial company and its grounds, by invoking that the relevant dispute cannot be heard in the tax debt recovery procedure against the board member or that the SRS decision has already entered into force.