Latest guidelines of Estonian Supreme Court for making a liability decision to company’s management board members

A company and the members of its management board are both liable for the performance of the company’s tax liabilities. To collect tax arrears from the members of a company’s management board, the tax authority can make a liability decision. As a liability decision can be made given that the obligations of management board members deriving from tax laws have been violated, in practice the liability decision is only used in a situation where it is not possible to collect the tax arrears from the taxable company itself.

The liability of a management board member for payment of tax arrears to the tax authority is similar to the liability of a management board member to any other creditor. By Ruling No. 3-3-1-15-12 of 27 November 2012, the Supreme Court en banc has laid down clear prerequisites for making a liability decision regarding management board members, having regard to the general civil law scheme for compensation for damages in delict by management board members. Such prerequisites are the following:

(i)    The member of the management board of a company has intentionally or by gross negligence violated his or her obligation to ensure performance of the pecuniary and non-pecuniary obligations deriving from the Taxation Act and other tax laws;
(ii)    Tax arrears have been created due to the violation of said obligations;
(iii)    The liability decision shall establish causation between the unlawful behaviour of the person and the creation of the tax arrears;
(iv)    The tax arrears have been created namely due to the violation of the given obligation (tax arrears that had been created before the violation shall not constitute a basis for making a liability decision) (from Judgement 3-3-1-23-12).

In its Judgement No. 3-3-1-37-13 of 19 December 2013, the Supreme Court specified the guidelines how to define the violation of obligations deriving from tax laws and how to establish the causality and the guilt of a management board member for the purpose of making a liability decision. It can be said already at the start that the guilt of each management board member is individual and must be established separately.

In general, only a violation of the obligations set out in subsection 8 (1) of the Taxation Act, i.e. violation of the obligations provided for in the Taxation Act and other tax laws can be regarded as a violation which may result in making a liability decision on the basis of the positions of the Supreme Court. However, as an exception, the activities of a management board member in the internal relations of the company and the violations deriving therefrom may also result in making a liability decision in a situation where it is established that the purpose of the management board member was to avoid the payment of taxes. Internal corporate decisions shall be regarded as a violation of subsection 8 (1) of the Taxation Act only in case such decisions are made for the purpose of tax evasion.

In addition to the activity with the purpose of tax evasion, the tax authority and courts shall also establish the existence of causality. It means that the acts or omissions of the management board member must be in such a cause-and-effect relationship with the creation of the damage that the damage created is a clear consequence of such act or omission. Therefore, according to the positions prevailing in court practice, a liability decision cannot be made regarding tax arrears that were created earlier than the denounced behaviour or that arose for different reasons.

A tax authority shall certainly substantiate the guilt of the management board member in a liability decision, and if the liability decision is not motivated, the management board members are not required to evidence that they are not guilty. As to guilt, it has to be taken into account that the intent of violating an obligation deriving from a private law relationship does not mean or entail the intent of achieving any results related to tax laws, and it has to be established that the management board member knowingly intended to avoid payment of the company’s tax arrears.

In general, a liability decision can only be used for claiming the valid tax arrears which means that the liability of a management board member for the payment of tax arrears is accessory. However, in exceptional cases, a liability decision made before a company is deleted from the register and the tax liability ends, may still remain in force with regard to a management board member. Having performed an obligation deriving from a liability decision, the management board member will have the right of recourse to the taxable person. Such a right of recourse, however, is not regulated by tax laws and in practice respective claims are generally not filed – usually there is nothing left to be recovered from the taxable person itself (the company that is in financial distress).