The VID is increasingly using its statutory right to demand reimbursement of overdue tax payments from a company's board member in cases where it is impossible to recover tax debts from the company itself. This article covers a successful case resolution in court, which cleared the former manager of a construction company (a PwC Legal client) of a company tax debt amounting to almost 150,000 EUR.

Nuances of the regulatory framework

The legal basis for a decision to claim reimbursement of a company's overdue tax payments from its board member (the “reimbursement decision”) is Section 60, Paragraph one of the Law “On Taxes and Duties” (hereinafter “Taxes and Duties Law”). This legal provision contains five cumulative criteria that, if met, allow the company's tax debt to be recovered from its manager:

1. the total amount of overdue tax payments exceeds the sum of 50 minimum monthly wages set in Latvia;

2. the decision on the recovery of overdue tax payments has been notified to the legal entity;

3. it is established that after a decision has been made to carry out a tax audit, a notice has been sent regarding specific discrepancies found during a data compliance check between the information submitted by the taxpayer and the information in the possession of the VID, a thematic inspection report has been drawn up if significant violations indicating tax evasion were found during the thematic inspection, and also, after the overdue tax payments have arisen, the legal entity has alienated its assets and, as a result of the board member’s action or omission, the legal entity's overdue tax payments have not been fully made within the deadlines set by law;

4. a report on the impossibility of recovery has been drawn up;

5. the legal entity has not fulfilled the obligation set forth in the Insolvency Law to submit an application for the legal entity's insolvency process.

This version of the provision has been in force since 1 January 2020 and significantly amended the third point of the first paragraph of Section 60 of the Taxes and Duties Law, which was applicable previously. According to the previous version of the norm, in order to adopt a reimbursement decision, the VID had to establish that after the overdue tax payments had arisen, the legal entity had alienated assets to a person who, in relation to the board member, met the definition of an interested party under the Insolvency Law. However, establishing this specific criterion was the most difficult task for the VID, which is why the norm was improved over time. As can be seen from the new version of the norm, it no longer matters what the status is of the person to whom the company’s assets have been alienated. Currently, it is sufficient to establish the fact that, while awaiting a VID audit or while the tax debt existed, the company’s assets were alienated, and the action or omission by the board member led to the tax debt not being covered.

At the same time, carelessness in applying the version of the legal norm became the key to success in this case.

Case circumstances

In this case, the board member was accused of alienating two of the company’s vehicles and failing to pay the tax debt between 2017 and 2018. For the reimbursement decision to be lawful, all the criteria set out in the legal norm that was in force at the time the individual performed their duties as a board member and the company incurred the tax debt had to be met. Within the framework of the dispute in question, the VID, among other things, had to establish that the company’s vehicles had been alienated to an interested party.

However, the VID decided to take a different route and base its decision on the version of the legal norm in force at the time the reimbursement decision was made (December 2021), rather than at the time the potential violation occurred. In other words, the VID applied a legal norm that significantly changed the scope of circumstances to be clarified and simplified the subject of proof. The VID chose not to evaluate whether the buyers of the company's vehicles could be recognised as interested parties in relation to the company's manager.

The fact that the VID had erred in the subject of proof was discovered while preparing the defence position for the court.

In fairness, it should be noted that it would hardly have been any easier for the VID even if the VID had applied the correct version of the legal norm. The board member's “malicious conduct” in alienating the vehicles was highly debatable, as one of them had been alienated before the company incurred the tax debt, while the second was the object of a financial lease that the company could no longer keep.

VID argumentation

In court, the VID presented some rather interesting arguments while opposing the cancellation of the reimbursement decision. The VID pointed out that, according to Section 1, Paragraph three, Clause 5 of the Administrative Procedure Law (APL), an administrative act is not a decision made in proceedings regarding an administrative offence. Administrative process and administrative offence proceedings are two different processes regulated by different legal acts. The VID noted that the administrative process is determined by the APL, while administrative offence proceedings are regulated by the Administrative Liability Law (AAL). In the VID’s view, this meant that the applicant’s argument—that Section 60, Paragraph one of the Taxes and Duties Law should be applied in its historical version because a person who has committed an offence must be held accountable for it in accordance with the regulatory act in force at the time of the offence (pursuant to Section 4 of the AAL – temporal application of the law)—should be deemed unfounded. The VID emphasised that an administrative act regarding the reimbursement of overdue tax payments to the budget from the applicant had been issued (in this case, the applicant was not held administratively liable). Thus, the VID had adopted the reimbursement decision on justified grounds, applying the regulatory acts that were in force at the time the respective administrative acts were issued. Furthermore, when applying Section 60, Paragraph one of the Taxes and Duties Law in its currently effective version, it no longer matters to whom the debtor alienated their assets.

It should be clarified here that the argument that the reimbursement decision was a decision in an administrative offence case was never raised for the applicant’s defence. The applicant’s position was primarily based on Section 9, Paragraph four of the Official Publications and Legal Information Law, according to which a regulatory act or a part thereof has no retroactive effect, except in cases specifically provided for by law, and in this particular case, the legislator did not choose to set a different procedure for applying the norm. Thus, while undoubtedly agreeing that the administrative process and the administrative offence process are different, in the circumstances of the dispute in question, the VID’s argumentation was neither well-founded nor substantively comprehensible.

Court conclusions

Examining the case on its merits, the Administrative District Court found the applicant's arguments to be correct. The court pointed out that according to the general principle of law, a legal norm is applicable from the moment it enters into force. The retroactive effect of a legal norm means that it is applied to situations that arose before it entered into force. Specifically, such a norm is applied both to past legal relations and to those that are still ongoing. A legal norm can be given retroactive effect only by its issuer. Given this, it is specifically the retroactive effect of a norm that must be separately provided for in transitional provisions. For legal relations that have already been established, the norms that were in force at the time the relations were established must be applied. The court rightly noted that in this case, the legislator, while amending Section 60, Paragraph one, Clause 3 of the Taxes and Duties Law, did not provide for transitional provisions that would set out a procedure for evaluating the actions of board members in relation to the alienation of assets at the time they were fulfilling their duties as board members. The absence of such transitional provisions in the law is grounds to conclude that the most useful and fair interpretation of the legal norm is that it is forward-looking, and the new stricter requirements apply to board members dealing with taxpayer assets at a time when the new legal norm is in force, without extending these requirements to events that took place in the past when it was not yet in force. Therefore, the VID should have evaluated whether the persons to whom the assets were alienated could be recognised as interested parties within the meaning of the Insolvency Law. However, the VID did not carry out such an evaluation in the reimbursement decision.

The court also noted that the VID's duty to apply the legal norm that was in force at the time the applicant was fulfilling their duties as a board member, and which was more favourable to the applicant, is even more justifiable given that the consequences provided for in the legal norm are comparable to the field of criminal law. Section 5, Paragraph one of the Criminal Law stipulates that the criminality and punishability of an act (action or omission) are determined by the law that was in force at the time it was committed. At the same time, the principles summarised in Section 5 of the Criminal Law provide that a law which declares an act to be non-punishable, reduces a penalty, or is otherwise favourable to a person has a retroactive effect. In view of the above, the VID must apply the legal norm that was in force at the time the applicant fulfilled their duties as a board member, unless the new legal norm is more favourable to the private individual.

In conclusion, it should be noted that in this case, the flaws in the reimbursement decision could not be corrected even during the course of the litigation, as the subject of the application was the cancellation of an unfavourable administrative act. According to the principles established in jurisprudence, the court is not granted the authority to interfere in the competence of the authority and decide for itself issues that must first be evaluated and decided by the specific competent authority. As already mentioned, in accordance with Section 60, Paragraph one of the Taxes and Duties Law, the VID has the right to initiate the process if all the criteria mentioned in this paragraph are met. However, one of the criteria justifying the obligation imposed on the applicant to reimburse the company's overdue tax payments to the state budget has not been evaluated and proven, because the VID did not correctly evaluate the fact of its existence. The VID applied the wrong substantive law, but the court has no obligation to evaluate facts in place of the VID that were not evaluated in the decision, in order to determine the applicant's obligation to reimburse the company's overdue tax payments to the budget. As the decision is an administrative act unfavourable to the applicant and does not comply with substantive law, it has been cancelled as of the date of its adoption.