When do third parties become liable under tax law?
Liability means assuming responsibility for the actions or omissions of another person (this is referred to as “vicarious liability” in English). Under tax law as well as under customs law it is possible – in certain circumstances – that a third person be held liable for the taxes or customs duties instead of the original debtor.
When does liability under tax law apply?
Liability under tax law applies when the original debtor cannot pay the taxes or duties. This is often the case when the party liable for the taxes or duties goes bankrupt, in particular in the case of companies. If the company is no longer able to pay the fixed duties or taxes, it is possible that the tax authorities issue liability orders to its representatives, i.e. the managing directors. This liability under tax law as defined by sec. 69 of the German Fiscal Code (Abgabenordnung) enables the tax authorities to hold representatives personally accountable for the taxes or duties.
Extended liability under tax law: tax evasion
If tax evasion is suspected, the number of liable parties increases. Thus, in addition to the original debtor, under sec. 71 of the German Fiscal Code (Abgabenordnung) every perpetrator of or participant in tax evasion can be held liable. In practice, this means that shareholders will be held liable as well as managing directors, because the tax authorities suspect that they colluded with the managing directors or are even considered de facto managers.
Extended liability under tax law: the period of limitation for the assessment
If the requirements of extended liability under tax law are met, the period of limitation for the assessment will also be extended. Whereas customs duty, as a rule, becomes time-barred after 3 years and tax after 4 years, the period of limitation for tax evasion cases is 10 years. Liability under tax law thus applies retroactively for 10 years. This circumstance frequently leads to the liability in the company becoming a liability trap for all persons involved. The widespread view that a German limited liability company (GmbH) protects from personal liability does not hold true for liability under tax law.
When do companies become liable for criminal offenses committed by employees
Besides the personal liability of managing directors or shareholders, the company itself can be held liable under tax law for violations committed by employees. This is, above all, the case when managers commit criminal or regulatory offenses in the course of performing their duties. Furthermore, in the event that they fail to fulfil their supervisory duties, managers can be held personally liable if employees commit criminal or regulatory offenses as a consequence.
Steps to follow when threatened with liability under tax law
As with other orders, liability orders must be challenged by an appeal. Besides, it is possible to make a request for suspension of enforcement. If the tax or customs authorities do not redress the situation, a complaint must be filed with the fiscal court (Finanzgericht). If the liability is based on tax evasion it is possible to obtain immunity from prosecution by filing a voluntary disclosure.
Would you like to find out more about liability under tax law?
Read my article about the “liability carousel” in the npoR (Magazine for the Laws of Non-Profit Organizations) 2016, 209 on the topic “Haftung des Vorstandes wegen Steuerhinterziehung” (Liability of the Executive Board due to Tax Evasion) or come to one my courses at BVL Seminare.
This post is also available in: German
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