When I was approached to write an “introductory course” for new businesses on taxes, it seemed that the article would consist of only one sentence, because the most important thing entrepreneurs need to know about taxes is that “One way or another, taxes will have to be paid!”. This is a truth that new entrepreneurs do not consider, just as they do not consider that any business activity is always associated with risk, including the risk of “getting into” tax debts.

Thinking about new entrepreneurs, a comparison with newlyweds inevitably comes to mind, where the state is like a harsh wife who, in the event of a divorce, will ensure that everything due to her is paid, even if the former spouse is left with nothing.

In the context of statistics showing that ~40% of newly established companies cease operations in their first year, and ~90% of the remaining companies cease operations in the next five years, I would advise new entrepreneurs to think about business in a broader context – not only about times when everything is good and rosy, but also about times when everything is bad and there is no money to pay taxes to the state.

Although none of the newlyweds like to think about a possible divorce, marriage contracts are usually concluded before marriage. Similarly, when starting a business, you inevitably enter into a relationship with the state, so it is worth considering how you will “dissolve” this relationship if the business does not quite succeed as planned.

Since, when starting a business, the owner of a commercial company’s capital shares is usually also a board member, let’s look at the possible “dissolution” of relationships from the perspective of board members’ liability.

THE MOST COMMON MISTAKE

Let’s imagine the worst-case scenario. The business has failed, and the company has accumulated tax debts for which there is insufficient money to pay. Very often, board members rush to abandon the “sinking ship” (i.e., the company), leaving it without an executive body to manage and represent it. They believe that such a step will save them from the State Revenue Service, from creditors, from everyone. However, such a step is justified only if the “sinking ship” is abandoned legally correctly.

Although there is no one-size-fits-all recipe, the main steps a board member should consider when a company is burdened with tax debts are as follows:

   a) Use the legal options to divide tax debts into installments or defer them for a period (from 1 to 5 years, depending on the reasons why the company incurred tax debts) or find other solutions for tax debt payment. Remember that the state prioritizes its own interests, and institutions care little that, besides the state, the company also has other creditors or employees who are also awaiting payment.

   If it has not been possible to divide or defer the payment of tax debt, or if, even after deferring or dividing the tax debt into installments (or other measures), there is still insufficient money to cover the tax debts, then consider submitting an application to the court for initiating a legal protection process or a legal entity insolvency process.

   b) If the signs of a legal entity’s insolvency mentioned in Section 57 of the Insolvency Law exist, then the board member even has an obligation to submit an application to the court for initiating an insolvency process. To submit it, the board member does not need to obtain the consent or decision of the commercial company’s shareholders.

   If the board member is also a shareholder of the commercial company, then before submitting an insolvency process application to the court, there must be clarity about future plans. Everyone is used to the idea that it is possible to initiate an insolvency process for a company with tax debts, but continue economic activity with a new company (without tax debts). However, this practice no longer works! The State Revenue Service very actively recovers unpaid tax debts of an insolvent company from a new company if it determines that the new company essentially continues the economic activity of the insolvent commercial company, taking over its workforce, assets, suppliers, etc., i.e., if a transfer of the undertaking has occurred.

  c) Ensure that the company’s property and all accounting documents are handed over to the insolvency administrator. Document the fact of property and document transfer.

Unfortunately, more often, the abandonment of a “sinking ship” (or a company in financial difficulties) happens quite differently. Namely, when board members leave, the company is left to its fate – without an executive body (board); doomed to forced liquidation.

However, such reckless action can have far-reaching consequences, which can be prevented (or at least mitigated) by timely submission of a legal entity’s insolvency process application. At the beginning of this article, the relationship between an entrepreneur and the state was compared to that of spouses.  The insolvency application is a kind of “marriage contract” that can prevent the state (as a grumpy wife) from leaving the board member with nothing!

ADMINISTRATIVE LIABILITY

Firstly, a board member, during whose term of office the company incurred tax debts, may be held administratively liable for not submitting a legal entity’s insolvency process application. If this company’s obligation arises in connection with unfulfilled tax, duty, and other state-mandated compulsory payment obligations, then the State Revenue Service is entitled to impose a fine on the board member – from EUR 300 to EUR 1,000. However, a fine is not the worst thing that can happen. As a rule, the State Revenue Service is also entitled to impose an additional penalty – a prohibition from holding certain positions in commercial companies for a period of up to 5 years, which significantly restricts any future commercial activity.

In practice, it has been observed that the State Revenue Service imposes the maximum fine and the aforementioned additional penalty if it determines that the application for initiating an insolvency process has not been submitted by the date of review of the administrative liability process. If the company has been left without a board, then the former board member of the company will not be able to submit a legal entity’s insolvency process application.

INCLUSION IN THE LIST OF RISK PERSONS

In addition, a board member, during whose term of office the company had tax debts exceeding EUR 15,000 or other circumstances arising during their term of office caused the suspension of the company’s economic activity, may be included by the State Revenue Service in the list of risk persons,[1] from which it is possible to exit in only 3 ways:

   a) by paying the company’s tax debts or extending their payment term (i.e., by receiving a decision from the State Revenue Service on the voluntary fulfillment of the company’s overdue tax payments with a term of up to three years);

     b) by submitting a legal entity’s insolvency process application to the court;

   c) upon the expiry of the term specified in the law “On Taxes and Duties” – 3 years after the board member’s inclusion in the list of risk persons.

The easiest way, of course, would be to submit a legal entity’s insolvency process application to the court, but this will not be possible if the company has been left without a board. Moreover, in practice, it sometimes happens that in cases where a company has several board members, the State Revenue Service requires all board members to sign and submit the legal entity’s insolvency process application for their exclusion from the list of risk persons. Although the author of the article does not believe that such a requirement is legal (and stems only from a literal interpretation of the law), a board member who has left their position before the insolvency process application is submitted will not be able to fulfill this requirement and will consequently be forced to remain on the list of risk persons for a long time.

PERSONAL LIABILITY OF A BOARD MEMBER FOR THE COMPANY’S TAX DEBTS

Finally, let’s not forget that, according to Chapter XI of the law “On Taxes and Duties”, the State Revenue Service may initiate a process for the recovery of the company’s overdue tax payments from a board member, during whose term of office the respective tax debts arose, if certain criteria are met, including if a legal entity’s insolvency process application has not been submitted. If the State Revenue Service has initiated a process for the recovery of a legal entity’s overdue tax payments to the budget from a board member, then, in accordance with Section 61 of the law “On Taxes and Duties”, the State Revenue Service, based on the board member’s application, revokes the decision on the recovery of overdue payments if the court issues a decision regarding the legal entity on the initiation of a legal protection process or the declaration of a legal entity’s insolvency process.

Those board members who have left their position, leaving the company to its fate without a board, will not be able to submit a legal entity’s insolvency process application or an application for the initiation of a legal protection process. Accordingly, the board member may have to pay the company’s tax debts from personal assets.

Summarizing all of the above, the most important thing to know about taxes is that when you start a business, you will inevitably enter into a relationship with the state, but these relationships do not have to be complicated and unpredictable, provided you act as a diligent owner and are aware of your responsibility as a board member.

Yours, Alisa