On tax liability attribution, the law of second opportunity and company documentation and records
Published on 22nd Jun 2021
In recent years, Spanish tax authorities have exponentially increased their use of the legal mechanisms to attribute the tax liability from the original taxpayer to another. The figures in this context are indisputable: the Tax Authorities' last report, published in 2019, mentions that 23,552 liability attribution procedures were initiated, a 119% increase compared to 2018. The conclusion seems obvious: from a collection standpoint, tax liability attribution works.
This should not be surprising, since this is mechanism which, at the moment, allows Tax Authorities very broad discretion, at least until the Courts outline and delimit its scope.
From the point of view of the taxpayer held liable, the perception can be very different; especially, in the case of an individual held liable for the tax debts of a company, where such individual was a director or member of the board. An example of a situation which occurs repeatedly would be that of an individual, who was a former director or member of the board in a Spanish company. During his or her directorship, the company was faced with a tax audit resulting in a tax assessment and penalties. The company may have appealed, it may have initiated bankruptcy proceedings, or even bankruptcy may have been declared, after the tax assessments have been appealed and payment of such assessment has been suspended.
In any case, during the time period in which the appeal is ongoing and during the bankruptcy proceedings, the statute of limitations would not elapse in relation to the collection of these debts, neither for the taxpayer, nor for any other person to whom liability may be attributed. This does not preclude Spanish Tax Authorities from initiating liability attribution proceedings. Tax Authorities then have discretion as to the moment when they declare the primary taxpayer has not met its obligation ("declaración de fallido"). This declaration is a legal requirement in a case of attribution of secondary liability.
Once such declaration has been issued, the Tax Collection Office may initiate secondary liability attribution proceedings with regard to the director, provided the legally required conditions are met:
(i) there has been a tax infringement;
(ii) the tax debt, to which the infringement relates, has not been paid, whether totally or partially; and
(iii) there has been a declaration that the primary taxpayer (the company) has not met its tax obligations.
The appeal before administrative tribunals, the judicial review and the bankruptcy proceedings may last much longer than the four years statute of limitations period, applicable to the Tax Authorities' collection powers. Therefore, it is possible to see cases of liability attribution in relation tax debts which are significantly "old" affecting individuals who were formerly directors of a company with which they have currently no relation whatsoever.
There is currently no established case-law on whether or how liability attribution can accommodate general constitutional and tax law principles. Therefore, Tax Authorities can simply attribute liability with no heed to the principle of economic capacity and the prohibition of confiscatory measures, established in article 31 of the Spanish Constitution.
In such a scenario and in addition to the length of time during which the debt has been outstanding, it is possible that the actual amount due exceeds the personal current or future wealth of the individual held liable. In addition, administrative acts can be immediately executed, therefore the individual held liable will be obliged to pay, secure payment through a collateral or bank guarantee or request a guarantee waiver which may or may not be granted.
Individuals whose a personal wealth is below the amount of the debt which has been attributed to them, has the possibility of initiating bankruptcy proceedings and, in accordance with Spanish Bankruptcy Law (formerly known as "law of second opportunity"), petition the court to be exonerated from payment of the outstanding tax debt attributed to them. If they are lucky, the court may consider that exoneration can apply to the debt attributed.
Finally, the above course of action does not hinder the possibility of appealing the act of liability attribution. It is important to note that a secondary liability attribution allows the taxpayer to question the substantive grounds of the assessment; in other words, to review the initial tax assessment and penalty. The defense against a liability attribution procedure can thus be twofold. On the one hand, there is the analysis of the procedure itself and the act of liability attribution (grounds to impose liability, legal requirements, statute of limitations, etc.). On the other hand, it is possible to question the original tax debt, which allows for the review of the tax audit or proceedings which gave rise to the initial tax assessment, both the grounds for the assessment as well as the original procedure itself.
With respect to the substantive analysis, a review of the original file will be necessary, with a view to maybe submitting additional documents or evidence, not in the file, and which may be relevant for the subsequent liability attribution. Therefore, the issue, many times discussed, relating to the time-period during which a company should keep its records and documents, takes on a new dimension in light of the attribution of liability for tax debts which may be significantly "older" than 6 years (the standard time-period during which a company should keep its commercial and company documentation). Former directors of companies, which are now insolvent and have with outstanding tax debts and penalties, would be well advised to keep all corresponding documentation and records. They may very well need them.