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Liability – The extent of the discretionary authority to choose when asserting claims against managing directors

The liability of managing directors is usually more extensive than that of non-managerial employees because managing directors are not dependent employees but, rather, officers of the company. This characteristic is particularly important in the event of a company becoming insolvent because there are also comprehensive rules on liability under tax law. In cases of insolvency, if a managing director, for example, acted to the disadvantage of the local tax office when distributing funds then s/he would be liable. Generally, the local tax office has broad discretionary leeway in such a case, nevertheless, when there are several managing directors the tax office should take into account any allocation of functions.

Issue – Liability for tax debts

In a case brought before the Schleswig-Holstein tax court, two managing directors had presided over the fate of a GmbH (a German limited company). The managing director who was the claimant here was not responsible for managing the day-to-day business, in fact, it was his job to ensure that the sale of a shareholding was conducted properly. Although, he did sign the annual financial statements as well as the tax return. When submitting a tax return, the GmbH took a view of the law that was different to that of the local tax office and did not pay the tax on the higher profits that had been determined by the tax office. As the company subsequently became insolvent the local tax office held the claimant fully liable for the foregone tax revenue; however, it did not attribute any liability to the other managing director.

Tax court decision – Assertion of the claim was unreasonable

The judges in Schleswig-Holstein ruled, in a final judgement on 5.2.2019, that the claimant had been right to challenge the decision of the local tax office (case reference: 1 K 42/16,). While the local tax office is indeed allowed discretionary leeway, nevertheless, in the case in question this was exploited in a way that was unlawful. All the managing directors should have been held liable to the same extent.

Recommendation: In order to limit liability, the range of responsibilities of each managing director should be clearly defined in an executive organisation chart.

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