A revolution in liability for tax debts - what is the Ministry of Finance planning?
The Ministry of Finance is preparing one of the most important legislative changes in recent years, which will affect managers of more than 500,000 limited liability companies (sp. z o.o.) and joint-stock companies in Poland. The draft amendment to the Tax Ordinance (no. UC138) provides for a radical tightening of the rules on the liability of persons managing capital companies for the companies' tax arrears.
Contrary to popular belief, management board members are already liable for companies' tax debts with all of their personal assets. Statistics show that as many as 60,000 managers bear this liability every year, including former managers - what matters is who held a management function at the moment the arrears arose. The new rules are intended to extend this liability significantly further.
The public consultation on the draft has already ended, and critical positions were submitted by, among others, the Lewiatan Confederation, Employers of Poland (Pracodawcy RP), the National Chamber of Tax Advisers (KIDP), the National Bar Council (NRA) and the Association of Accountants in Poland. Despite this, the Ministry of Finance is maintaining most of the proposed changes.
The most important changes - who will be liable for a company's taxes, and how?
The draft amendment introduces several fundamental changes that should concern anyone holding a management role in capital companies. As Tomasz Rolewicz, tax adviser and partner at Grant Thornton, emphasises, this is a change that is fundamental to the entire model of liability in companies.
Widening the circle of liable persons
Liability for the tax arrears of capital companies (sp. z o.o., joint-stock companies, simple joint-stock companies (PSA)) is to cover not only formal management board members, but also other persons who actually manage the company - including informally. This concerns the institution of the so-called shadow director, that is, a person who in fact runs the company's affairs but hides behind "straw men". Liability will also extend to finance, tax and compliance directors, as well as persons responsible for implementing management board decisions.
Other key changes
In addition to widening the circle of liable persons, the draft provides for further significant modifications, which are worth setting out clearly:
- Decision on asset security - the tax authority will gain the ability to freeze a manager's personal assets even before issuing a decision on liability, in order to prevent the disposal of assets.
- Longer limitation period - from the current five years to seven years, with the period running until the decision is issued, not until it is served. In extreme cases - as the Supreme Court calculated in its comments - this gives as much as over 11 years to hold a manager liable.
- A new liability model based on negligence - instead of the current criterion of filing for bankruptcy on time, a manager will have to demonstrate that they exercised due care in running the company's affairs.
- Reversal of the burden of proof - the mere fact that a tax arrear has arisen will give rise to a presumption that the management board failed to exercise due care. It will be up to the manager to prove that they did.
New rules for escaping liability - three lines of defence
The proposed changes to Article 116 of the Tax Ordinance completely rebuild the current system of grounds for exemption from liability. The current reference point, namely the timely filing of a petition for bankruptcy, will disappear. In its place will come an assessment of whether the managing person exercised due care so that the arrears did not arise at all.
Tomasz Rolewicz identifies three lines of defence that will be available to managers once the changes enter into force:
1. Challenging the company's arrears themselves
The proposed Article 116 § 6 gives a manager the possibility to demonstrate in the liability proceedings that the tax arrear does not exist or is lower than results from the assessment decision or the company's return. Together with the right of access to the assessment proceedings file, this should provide a real defence tool, which in practice is lacking under the current legal framework.
2. Demonstrating due care
This is the most important, but also the most difficult, line of defence. The proposed Article 116 § 3 sets out three pillars of the standard of care: appropriate qualifications, assuming responsibility for the company's affairs as a whole, and implementing an effective organisational framework guaranteeing the correctness of tax settlements. The standard is abstract - a manager's conduct is compared with the hypothetical conduct of a model manager in an analogous situation.
The key point is that the defence begins long before any dispute. The evidence will be documents created in the normal course of business: tax procedures, a described document flow, the division of roles and oversight, reporting to the management board and a record of reactions to identified risks. An internal division of duties within the management board will not in itself automatically exclude liability.
3. Remedying the situation - paying the predominant part of the arrears
The proposed Article 116 § 2 point 2 provides for a kind of "bonus for remedying the situation". If, before proceedings were initiated, actions were taken that led to payment of the predominant part of the arrears, liability lapses. However, the concept of the "predominant part" remains undefined, which raises justified interpretative doubts.
Criticism of the draft and the Ministry of Finance's announced corrections
Business organisations and experts raised numerous objections to the draft. Employers of Poland pointed out that the lack of precise criteria for identifying the managing person breaches the principle of legal certainty. KIDP and the NRA are calling for the conditions for exercising due care to be specified, in order to limit the discretion of the tax authorities. The advisory firm MDDP warned that asset security at the stage of the proceedings may lead to unjustified "freezing" of the private assets of third parties.
In response, the Ministry of Finance announced selected corrections: clarifying the concept of the person actually managing, supplementing the draft with provisions setting out the conditions for exercising due care, and clarifying the rules for issuing security decisions. However, the ministry refused to introduce a closed catalogue of circumstances demonstrating due care, arguing that this would lead to the "complete negation of relying on this liability model".
It is worth stressing that the Ministry of Finance accepted the KIDP's proposal to exclude management board liability for the period of a company's participation in the Cooperation Programme. However, most of the remaining comments will not be taken into account, and the ministry firmly maintains, among other things, the extension of the limitation period to seven years.
What should managers do now?
Although we will learn the final shape of the rules only after a new version of the draft is published, the direction of the changes is clear. Managers of capital companies should already take preparatory steps that may in future serve as evidence of due care:
- Carry out an audit of tax procedures in the company and document the existing organisational framework.
- Implement or update tax compliance procedures, including document flow and a risk reporting system.
- Document the division of responsibilities within the management board and the rules for oversight of tax matters.
- Gather tax opinions and interpretations concerning the company's key transactions.
- Consult a law firm to assess individual risk and prepare a defence strategy.
The proposed changes to liability for company tax debts are groundbreaking and will affect hundreds of thousands of managers in Poland. It is not worth waiting for the rules to enter into force - preparations should begin today.
Do you need an individual risk analysis or help preparing procedures to protect your personal assets? Contact our firm - we will help you protect yourself against the consequences of the new rules.
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