Management on board member personal liability for unpaid tax in Estonia

A recent ruling of the Supreme Court of Estonia concerns liability of management board members. In order to become liable, a management board member must firstly fail to fulfill their obligations through deliberate action or by gross negligence. Also, the failed obligation must arise under tax law in Estonia and the tax liability must be a result of breach of obligations by the management board member. To avoid creation of sudden tax liabilities, management board members must ensure fulfillment of their obligations with all due diligence.

Often a claim against a management board member is preceded by a claim against the undertaking. In practice it is not uncommon that a tax claim alleges violation of the obligation to exercise due diligence but further liability claims allege intentional violation of obligations by a management board member. The court ruled that breach of the obligation to exercise due diligence cannot be the basis for intentional violation of tax law. The court further explained that the Tax and Customs Board is entitled to draw different conclusions in different cases as regards the nature of violations.

The position concerning division of the burden of proof arising from a claim should be viewed with caution. In the context of fiscal procedure the investigative obligation is laid upon the Estonian Tax and Customs Board.  Therefore, the Tax and Customs Board must identify the circumstances increasing and also decreasing tax liability. According to the courts, violations by the taxpayer were substantial and presumably these violations could amount to fraud. Therefore, management board members must exercise due diligence in carrying out their obligations.