Under general principles of tax law the taxpayer is solely liable for incurred arrears. However, there are important exceptions to this rule. One of the most marked exceptions is the joint liability of board members with all their assets for the tax arrears of limited liability and joint stock companies, even prior to incorporation. However, according to the Article 116 of the Tax Ordinance Act of 29 November 1997 (the unified text Journal of Laws 2005, No. 8, item. 60, as amended) this liability is only triggered when the execution against the company’s assets proved to be fully or partially ineffective.
In its decision dated December 8, 2008 (court file no II FPS 6/08), the Supreme Administrative Court interpreted the criteria for the finding of insolvency referred to in the Article 116 § 1 of the Tax Ordinance Act. In setting the standard for application the court analyzed the Article 299 of the Code of Commercial Companies (hereinafter the “CCC”).
The CCC provides that any evidence which shows that the company has no assets to satisfy creditor is admissible regardless of the initiation of enforcement proceedings. This extremely lax evidentiary standard should not be applied in assigning joint liability to board members under the Tax Ordinance Act.
Therefore, the court interpreted the Tax Ordinance Act to require that such findings can be made after the enforcement proceedings have been concluded.
However, the court retained the application of low evidentiary threshold which allows any legally admissible evidence to be used in proving the insufficiency of funds.
Fortunately, there are two methods under which board member can waive liability under the Article 116 of the Tax Ordinance Act. Where the board member can demonstrate that (i) bankruptcy or bankruptcy prevention proceeding have been initiated in a timely manner or (ii) where the member did not negligently or intentionally prevent bankruptcy initiation or composition proceedings.
Another route for a board member to avoid secondary liability is if the member reports company property that is sufficient to satisfy a substantial portion of the debt. Importantly, liability of board members includes taxes incurred within the scope of the members’ duties during the time when they were actively on the board.
It is worth mentioning that a September 21, 2010 judgment of the regional administrative court in Warsaw (court file no III SA / Wa 510/10), affirmed by the Supreme Administrative Court decision on December 20, 2011 (court file no I FSK 192/11), held that board member liability for back owed taxes and interest cannot be interpreted without regard to the relevant provisions of bankruptcy law and the CCC. The wording of these provisions indicates that the interest on debts due for the period preceding the declaration of bankruptcy can be paid from the bankrupt company estate. It is also important to note that not only are the company assets liquidated but also the company is dissolved and deleted from the national registry. Consequently, after the conclusion of bankruptcy proceedings, which did not satisfy tax creditors and where the company lost its legal existence, the company itself will not be liable for the unpaid tax arrears, including interest calculated after the bankruptcy date. Also the board member of the bankrupt company cannot be liable for such interest on backed taxes. Therefore, as the administrative courts have highlighted, in the light of the aforementioned provisions a board member cannot incur a greater liability for the interest on backed taxes than the company itself would have suffered.