Is a Company Director responsible for unpaid VAT in the Netherlands?

A recent case decided by the Court of Justice of the European Union (CJEU) might open up a broader discussion around the use of joint and several liability to recover unpaid VAT liabilities.

In a recent Dutch case (C-613/23, Herdijk) the Court of Justice of the European Union concluded that joint and several liability of the company’s director for the company’s VAT is permissible under the EU’s VAT Directive as long as it does not go beyond what is necessary to achieve its aims. In other words, a company’s director can liable for unpaid VAT liabilities under the Dutch joint and several liability mechanism.

Background

The case brought to the CJEU concerns a person (KL) that was a director and sole shareholder of a holding company. The holding company was the director and sole shareholder in an operating company until 29 March 2019 when that business was sold to a third party. However, after the sale took place the Dutch Tax Authorities raised an assessment for additional VAT related to reporting periods prior to the sale. As the operating company did not pay the assessments the Dutch Tax Authorities decided to hold KL liable for the liabilities, interest and payment costs.

The decision was appealed in court and eventually the case was referred to the CJEU.

The decision

The CJEU was essentially asked:

• does the principle of proportionality in the EU VAT Directive preclude EU Member States from using joint and several liability in cases such as the one described above? In other words does the Dutch legislation on joint and several liability infringe EU principles and legislation and should therefore not apply.

• would the answer to the first question depend on whether the director acted in good faith, was prudent, and did everything reasonably within their power?

The CJEU outlines that article 273 of the VAT Directive allows EU Member States to implement measures that facilitate the collection of VAT liabilities that have not been paid within the mandatory time limits.

The article in question does not restrict the measures to other taxable persons and therefore such measures can apply to non-taxable persons, including private individuals that take part in the decision-making process within a taxable legal person, otherwise the effectiveness of such measures would be undermined.

Separately, it seems that EU Member States are given discretion around the type of measures they can implement. Nevertheless, Member States must exercise that power in accordance with EU law and its general principles, especially with the principle of proportionality. That means Member States must employ means which, whilst enabling them effectively to attain the objective of collecting the liability, cause the least possible detriment and must not go further than is necessary for that purpose.

In the case at hand the CJEU reviewed the provisions of the Dutch legislation and concluded that it was in line with the principle of proportionality. Specifically, while the director was liable for the unpaid VAT, if they had notified the Dutch Tax Authorities that they were having issues paying on time, then the joint liability would not apply unless the authorities could establish the failure to pay was the result of manifest mismanagement by the director during the three years preceding the notification date.

Why is this case important

Following Brexit many UK companies decided to register for VAT or set up subsidiaries in the Netherlands in order to facilitate trade with EU partners. While some of the principles mentioned by the CJEU in its judgement have been stated before (see case C‑1/21), the current decision deals explicitly with Dutch rules around joint and several liability and may therefore be important to UK businesses with a presence in this country as well.

With growing efforts to tackle public deficits in the EU, we can expect tax authorities to use the joint and several liability mechanism more often to recover unpaid VAT liabilities.

If you have any questions on this case or have a Dutch subsidiary and would like further information on joint and several liability, feel free to reach out to us.