The personal tax liability of the manager is not a fatality

The first degree administrative court of Luxembourg recently issued a judgment (number 43190) that is likely to reassure diligent managers and directors of commercial companies.

In the judgement, a member of the board of directors (‘Mr. X’) of a Luxembourg public limited company (société anonyme) received a tax guarantee assessment issued by the Luxembourg direct tax authorities (Administration des Contributions Directes (ACD)) on 10 October 2018, under the provisions of paragraph 118 Abgabenordnung (AO) making him joint co-debtor of unpaid withholding taxes on salaries that should have been withheld and transferred to the ACD by the company for the financial years 2014 and 2015.

Mr. X disputed the dismissal of his pre-litigation appeal to the Director of ACD, according to which “the liability of the representative is to be characterised as wrongful as long as he does not fulfil his tax obligations, which include ensuring that the taxes due are paid – even those dating from before he took up his duties – out of the administered funds, and that the claimant wrongly believes that he should not personally be liable. Therefore, charging the director with the company’s arrears relating to withholding tax on salaries and wages for the years 2014 and 2015, as well as the interest for late payment relating thereto, is perfectly justified as far as he is concerned”. Mr. X thereby lodged an appeal before the first degree administrative court of Luxembourg.

The personal liability of a director or a manager requires evidence of a specific fault (‘Schuldhafte Verletzung’), which refers to the lack of diligence or care in the execution of the tax obligations of the company he administers, or even simply poor administration, i.e., the fault that a normally prudent and vigilant person in the same circumstances would not have committed. Thus, the mere non-payment of a company’s taxes is not necessarily a fault and therefore not sufficient to engage the liability of its director.

In this respect, it should be noted that in this case, Mr. X was a director of the company for less than four weeks, in which time he had to replace the daily management director ‘administrateur délégué’ of the company who had been dismissed and to organise the company’s admission of bankruptcy.

Mr. X also argued that a criminal complaint had been filed by the parent company of company Y against the dismissed daily managing director for, among other things, misuse of company assets, breach of trust, fraud, forgery and use of forgeries, theft, simple and fraudulent bankruptcy and false declaration, and that numerous audits had been carried out on his initiative throughout the previous financial years. Additionally, Mr. X sent a detailed letter to the receiver of the company explaining and justifying all the failings and concealments of the dismissed daily management director.

In its judgment, the first degree administrative court considered that the behaviour of Mr. X did not result in any culpable breach of his obligations in that the concrete steps taken by him during the extreme brevity of his 26-day term of office show that he did everything possible to assume his responsibilities as director of the company without having, through any negligence on his part, contributed to the creation or even an increase in the debt of the said company to the tax authorities. On the contrary, by his rapid and effective intervention since the beginning of his mandate and following the reconstitution of the accounting and financial situation of the company after having revealed its state of suspension of payments and the admission of bankruptcy, Mr. X avoided any unnecessary increase in the debt of the company in question towards the public treasury.

In the current context of increasing implementation of the personal tax liability – whether direct or indirect taxation – of directors/managers, this judgment makes it possible to conclude that the said liability is not fatal for a diligent and proactive director/manager.