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Directors’ liability for tax debts

This blog is part of the Directors’ Liability Series.

Company directors bear a great responsibility, not only towards employees and shareholders, but also towards the tax authorities. An often underestimated aspect of this responsibility is the potential personal liability for tax debts of the company. This is because the tax authorities have far-reaching powers to hold directors personally liable if the company fails to meet its tax obligations. In this blog, we explain what the risks are and how directors can limit this liability.

Types of taxes

Under Section 36 of the Tax Collection Act 1990, a director of a company (an “entity” within the meaning of Section 2(1)(b) of the General Act on State Taxes) can be held jointly and severally liable by the tax authorities for the following taxes:

  • Payroll tax: The tax that the company must withhold from employees’ wages and remit to the tax authorities.
  • Sales tax (VAT): The tax that the company has to pay on the goods and services it supplies.
  • Corporate tax: The tax on the company’s profits.
  • Excise duties: Tax on certain products such as alcohol and tobacco.

Cases of liability – Notification of inability to pay

If the company is unable to pay the tax, the company is obliged to notify the Inland Revenue within two weeks of the due date of the tax assessment. Each director is authorised to fulfil this obligation on behalf of the company. Depending on whether such notification has been made (on time), the following situations apply:

  • Situation 1: timely reporting: if the company has complied with its obligation to report the inability to pay in due time, a director is liable if it is plausible that the non-payment of the tax debt is the result of manifestly improper management attributable to him in the period of three years preceding the time of the notification. The burden of proof for mismanagement lies with the tax authorities.
  • Situation 2: no (timely) notification: if the company has not (timely) complied with its obligation to report the inability to pay on time, in the context of the director’s liability, it will be presumed that the non-payment is due to the director and the three-year period will be deemed to start at the time the entity is in default. That presumption can only be rebutted if the director makes it plausible that it was not his fault that the body failed to fulfil its reporting obligation. Thus, the reverse burden of proof in this case lies with the director.

Liable persons

Liability for tax debts applies not only to the current director(s), but to former directors during whose administration the tax debt arose, de facto policymakers and, if the director is a legal entity, the directors of that legal entity.

Conclusion

As a company director, it is crucial to be aware of your obligations towards the tax authorities and the risks of personal liability. By timely notification of payment default, careful governance and seeking professional advice, you can avoid many problems. If you have any questions on this topic or need help taking the right steps, please feel free to contact us. Our team of experienced lawyers is ready to support and advise you.

In this blog, we identify a directors’ liability risk that has its origins in tax law. Wieringa Advocaten does not provide tax advice.

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Directors’ liability for tax debts

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