Recovery of Tax Debt from the Board Member of a Legal Entity

Currently, the issue of the State Revenue Service (SRS) pursuing debt recovery against board members for company tax debts is relevant. Article 169 of the Commercial Law of the Republic of Latvia stipulates that a board member must perform their duties as a prudent and diligent manager.

The primary task of a board member is to manage the company, make decisions related to the company’s economic activities, and its future development. In general, it can be said that the number of claims and legal proceedings against board members from the SRS is gradually increasing. The Law “On Taxes and Fees” (Article 60, Part One) provides for the personal responsibility of board members for the tax debts of a legal entity. The responsibility of the board is also stipulated by the Insolvency Law, and in addition, considering the amount of unpaid tax debt, the specific board member’s criminal liability may also arise.

Therefore, there is a risk in the activities of a board member concerning their assets and property if any requirement prescribed by law is not observed, or if someone decides to evaluate the board’s responsibility in the context of losses, unrealized business plans, unpaid taxes.

The SRS pursues debt recovery against board members for the company’s tax debt if these tax debts have arisen during the period when the person was holding the position of a board member and all the following criteria are met:

  • The amount of the tax debt exceeds 50 minimum wages;
  • The decision on the recovery of overdue tax payments has been notified to the company;
  • After the formation of the tax debt, the company transferred its assets to related persons;
  • The State Revenue Service has issued a report on the impossibility of recovering the tax debt from the company itself;
  • The company’s board has not fulfilled the obligation stipulated by the Insolvency Law to submit an application for the insolvency process of a legal entity.

Let us remind you that for the SRS to have the right to initiate a process against a board member, all the aforementioned circumstances must be established. Only in such a case, when it is objectively impossible and when all the criteria provided by law are met, does the service pursue the board member of this legal entity, whose term of office and actions (or inactions) resulted in the corresponding tax debt of the legal entity. Resigning from the position of a board member is not a tool to avoid reimbursing the state’s budget for overdue tax payments of a legal entity. Even a board member conscientiously fulfilling their duties can find themselves in a situation where delays and losses occur.

The specific mechanism contained in the legal norms regarding board members is designed to promote honest tax payments and enhance the efficiency of tax collection. In connection with such regulation, a board member should be aware of the consequences arising from the failure to fulfill the legal duty to manage the company’s daily operations with due diligence.

To avoid a situation where the company’s tax debts are recovered from a board member, we recommend carefully evaluating all transactions, paying particular attention to transactions between related persons, i.e., not transferring the company’s assets to related persons at an inappropriate market value, and certainly, if necessary, timely submitting an insolvency application.

Additionally, to balance the legal interests of board members and avoid board member liability resulting from unintentional actions that led the company to tax debt or even insolvency, board members can insure their civil liability.

For more information about the liability of board members or the range of legal services in insolvency proceedings, you can contact our specialists.

©INNOVATOR 26.06.2024.

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