We would like to inform you about an important judgment of the Supreme Administrative Court (SAC) No. 10 Afs 4/2024-38 of18 June 2024, which was published in the Collection of Judgments of the SAC. The court here confirmed for the first time the authority of the tax administrator to independently assess the conditions for the liability of members of elected bodies for tax debts of a company on the grounds of breach of due care under Section 159(3) of the Civil Code.

What was it about?

In the case in question, the sole managing director of the company, together with other persons, was finally convicted of the offence of tax evasion, which he committed by knowingly allowing the fictitious operation of the company in which he acted as managing director, as a result of which he extracted from the state budget an excessive VAT deduction of approximately CZK 13 million. The company was subsequently dissolved with liquidation and the tax administrator did not receive any funds from the liquidation balance. The tax administrator therefore addressed the sole managing director with a guarantee call issued in accordance with the Tax Code and asked him to pay the company’s arrears.

The SAC upheld the tax administrator’s procedure:

• According to Section 171(1) of the Tax Code, the guarantor is also obliged to pay the arrears if the law imposes the obligation to guarantee (and the tax administrator calls upon the guarantor to pay the arrears);
• this law may also be a private law regulation – here the substantive legal basis of the guarantor’s obligation is based on Section 159(3) of the Civil Code, which defines not only the scope of the guarantee, but also the conditions for its creation and termination (e.g. by paying for the damage caused);
• according to this provision, members of elected bodies are liable to creditors for the debts of the legal entity for damage caused by them during their term of office as a result of a breach of their duties to perform their duties with the necessary loyalty and the necessary knowledge and care, to the extent that they have not compensated the legal entity for the damage and to the extent that the creditors cannot claim performance from the legal entity itself;
• the fulfilment of the statutory conditions of liability, i.e. the breach of the duty to act with due care, the occurrence of damage, but also the duration of the obligation to compensate for the damage, must be proven by the tax administrator;
• However, the SAC upheld the objection that the guarantor may object stating the limitation of the guarantor’s obligation, but with the proviso that in exceptional cases the objection to limitation may be contrary to good morals or be an abuse of rights, in which case it shall not be taken into account. It will be for the appellate authority, to which the case has been remanded for further proceedings, to determine whether the statute of limitations objection was effectively raised by the executive.

It should be emphasised that committing a criminal offence is not a prerequisite for liability. The fact that the guarantor, as the statutory body of a legal entity, had been convicted of a tax offence only had an impact on the assessment of the time limit for issuing the summons. A guarantee call can generally only be issued within the time limit for tax assessment, however, in the present case the expiry of this limitation period does not prevent the creation of guarantee, since Section 148(6) of the Tax Code applies and the call can be issued until the end of the second year following the year, in which the court decision on committing the tax offence became final. However, according to the conclusions of the Supreme Administrative Court, the tax administrator is entitled to independently assess the occurrence of guarantee in the event of any breach of the performance of the duties of a member of an elected body consisting in a breach of due care.

Concurring legal opinion of the Supreme Court

It should be added that the judgment of the SAC followed a recent judgment of the Supreme Court (SC) of 27 March 2024, no. 27 Cdo 1993/2023-454, in which the Supreme Court concluded that in cases where the tax administrator believes that a member of an elected body of a legal entity is liable for a public debt of the company in the nature of tax arrears (in the given case, it was a fine for a gambling offence imposed by the customs office) and wishes to recover such a debt from him by virtue of the statutory liability, it must proceed in accordance with Section 171 of the Tax Code and call upon him to pay the arrear.  This notice is in the nature of a decision, which is an enforceable title under the Tax Code.

In the opinion of the Supreme Administrative Court, the tax administrator is entitled to assess the question whether the objective circumstances provided for by law for the liability to arise have been fulfilled (in particular, whether the liability under Section 159(3) of the Civil Code also applies to debts in the nature of tax arrears, whether due care has been breached and whether the company has suffered damage in a causal connection with this breach) as a preliminary question under Section 99 of the Tax Code.

Conclusion

Thus, it can be summarized that the Supreme Administrative Court (SAC) in this judgment, in which it formulated the rules for the tax administrator’s procedure when deciding on the guarantor liability of a member of an elected body of a legal entity for its tax arrears, outlined further negative consequences of a breach of due diligence.