The law does set a cap on how much a director can be held liable, but this liability cap does not apply if you default on paying withholding tax and VAT.
In this newsletter, we focus only on the risk of being held personally liable for VAT debt and withholding tax as there is a specific rule on this that applies to the detriment of the (official and factual) director. The risk of being held personally liable for social security debt will be featured in our next newsletter.
Guiding principle: No personal liability – In principle, a director of a limited liability company is not personally liable for the company’s VAT debt or withholding tax.
Tax authority can deviate from this principle – The tax authority does have the possibility, however, to hold the (official and/or factual) directors personally liable if it can demonstrate that the default is attributed to a fault that was made in managing the company. In assessing any potential fault, the tax authority considers the margin of discretion that a director has. In particular, a judge may not put himself or herself in the director’s place, but he or she is allowed to carry out only a minimum assessment of whether “any normal, careful, and prudent director would have taken the same decision” in the same circumstances.
Presumption of fault to the detriment of the director – The burden of proving that there is a specific fault that is linked to the default on paying the tax debt is rather heavy. For this reason, the law lays down a presumption of fault to the detriment of the director, which means the director is assumed to be at fault.
Article 51 of the Act of 13 April 2019 on the amicable and compulsory recovery of fiscal and non-fiscal debt claims stipulates that a director is presumed to be at fault and thus liable for the company’s tax debt if the following conditions are met:
- if the company pays monthly but it failed to pay at least 3 overdue amounts within the year;
- if the company pays every trimester but it failed to pay at least 2 overdue amounts within the year;
Produce evidence in rebuttal on time – If the company failed to pay this debt and if the tax authority holds you, the (official or factual) director, liable for it, then you, the director, must produce evidence in rebuttal.
It is important that you, as the (official or factual) director, respond to this notice of default and liability within the month after you’ve received it. In your response, you should clarify the circumstances and demonstrate that no fault lies at the base of this payment default. The tax authority can petition the insolvency court to hold you personally liable as director, and this at the earliest after 1 month elapses from the date of the notification.
Burden of proof shifts in favour of the director – It is important to note that the burden of proof can shift in favour of the director. In particular, if the reason for payment default is the consequence of financial difficulties that led to the company’s judicial reorganization, bankruptcy, or judicial dissolution, then the presumption of fault on the director will not apply. In such scenario, the tax authority bears the burden of proof and will have to produce evidence of fault. In circumstances of financial difficulty, you should also notify the tax authority about it on time.
The tax authority is using this favourable rule of evidence more and more, and directors usually write to the authority systematically if the abovementioned conditions are met. It is therefore important that you respond timely and thoroughly to its notification to avoid being held personally liable.