Personal Financial Liability of Board Members for Tax Arrears

As from January 1, 2015, amendments to the “Law on Taxes and Fees” have obligated board members with personal financial liability for tax arrears of legal persons. This change has resulted in more cases where board members challenge decisions of the State Revenue Service (VID) which impose their personal responsibility for delayed tax payments into the state budget. The paper provides an insight into these problems and features relevant legal points of view.

Process of Tax Audit and Control

Initiation of Tax Audit

• A decision was made to conduct a tax audit or control.

Commencement of Tax Audit

• Tax audit or control starts now.

Period of Tax Debts

• The tax debts have arisen during the period when the individual was a board member.

Sale of Company Assets

• Thereafter, the assets of the company are sold off.

Board Member’s Responsibility

Due to actions or omissions of a board member, a legal entity has not fully paid off its overdue tax liabilities within legally fixed periods, as evidenced by this part of the section.

Case Example

Recently, there was an instance when one member of a limited liability firm’s board was requested by VID to pay taxes which hadn’t been paid before. The VID’s decision was challenged by him on the basis that under Article 1405 of Civil Law company’s asset transfer transactions were invalid and therefore it continued owning those purportedly transferred assets contrary to Section 60(1)(3) Law on Taxes and Fees criteria mentioned above.

Legal Capacity and Asset Transfer

Court’s Decision on Capacity

• According to the Administrative Regional Court, the Senate agreed that at material time when such asset transfer transactions were taking place the company had capacity because it had a functioning governing body whose representatives were directors having full powers. Capacity is what empowers both individuals and entities to own property and enforce rights as well as make contracts or engage business activities among others obligations that can be undertaken while executing these capacities according to Black’s Law Dictionary (1999).

Board’s Authority Under Commercial Law

• According to Section 221 of Commercial Law, within its framework is a Joint Stock Company represented by executive body-comprising persons–board members who are given such powers under Section 223. This implies that: “The Board acts as the company’s managing body and serves as the organ of representation vis-à-vis third parties.” In other words, board can be explained in two forms: management of a corporate organization and acting on behalf of it.

Validity of Asset Transfer Transactions

• The courts held that a company had capacity so long as its board was functioning. The question whether the asset transfer transactions were valid because all members of board did not sign them goes to matters pertaining to representation rather than capacity under Section 223(3) Commercial Law. Under this provision, directors have unrestricted powers to act for and on behalf of any outside person they are dealing with including credit agencies or suppliers of goods whatsoever.

Lawfulness of Transactions

Apart from this, Courts also maintained that the determination of the lawfulness of transactions can be done by ordinary courts. Thus, if the transactions have not been nullified or invalidated by any means, they remain binding for a company. As a result, these asset transfer transactions were not legally challenged by the board members. Consequently, they had legal consequences as well as entailed an assignment of assets to third parties.

Responsibility of Board Members

Section 61 of the Law on Taxes and Fees

• The courts noted that according to Section 61 of the Law on Taxes and Fees, if evidence shows that a board member is not responsible for tax arrears and asset transfers, liability proceedings may be discontinued. However this was not shown in this case.

Joint Responsibility for Board Members

• According to paragraph 2 of Section 60 of the Law on Taxes and Fees-for instance-a legal entity with several members on its board shall have all members jointly liable for deficient tax payments made to it. Joint responsibility implies that any creditor can claim full payment from either party accountable under Sections 1670 or 1677 Civil Law.

Conclusion

This case serves as a reminder to board members about their personal financial liability towards unpaid tax liabilities owed by companies under their control. It underscores how important it is for them to actively participate in management of company assets and to comply with tax obligations. They must also bear in mind that they are at risk not only when they take active part in transmitting property but also when they do nothing improper. Therefore, competent professional advice would help board members mitigate these risks and ensure compliance with laws protecting both the interests of the company and its directors.

Role of Legal Advisors

Attorneys at law and lawyers in Riga play a crucial role in advising board members on their responsibilities and legal risks, helping them navigate the complexities of corporate governance and tax liability. By understanding and adhering to these legal requirements, board members can protect themselves and their companies from potential financial and legal repercussions.