Accepting a directorship position in a company can be attractive in terms of remuneration and reputation. However, before deciding on this, it is very important to consider the enormous responsibility of being a director, including the risks inherent in such a position.
The liability of directors must be analyzed based on Spain´s Corporate Enterprises Act (henceforth “LSC”) and Article 225, which establishes the duties of directors. Among these are the duty of care, that is, the obligation to perform the position with the diligence of an “orderly businessman,” complying with the duties established by law or by statutes; and the duty of loyalty, considering that the director must always act according to the company´s interests. If these duties are breached, the social responsibility of the directors will be enforced, as established in article 236 and the LSC.
However, this liability of the director is not only limited to the commercial sphere, but may result in bankruptcy, taxation, or other legal liability. In this sense, compensation restrictions, disqualification from holding office, or even criminal liability, among others, may be applied to a director.
In the remainder of this post, we view review liability from a tax perspective.
Tax liability
Tax liability is regulated in articles 42 and 43 of Law 52/2003 of December 17th, General Tax (henceforth “LGT”). It could be Joint and Several or Subsidiary, depending on whether the director is involved in the infringement and liable of commission.
Thus, the Joint and Several Liability (art. 42 LGT) implies an active participation in the tax liability infraction and it will also extend to penalties. In these cases, the government agency may designate the party to take action against: the company or the director.
On the other hand, Subsidiary Liability (art. 43 LGT), also known as referral liability, is acquired when an agency has not been able to recover the debt of the responsible party nor prove the director´s culpability, for example, by failing to duly execute his duties.
At first, it may not seem like it would be easy to demonstrate that a director´s Subsidiary Liability exists. However, government agencies are quick to pronounce liability in instances for which deadlines for submitting statements are not met, making it impossible to obtain the debt from the company as the director is strictly responsible for fulfilling the declaration deadlines. According to this, we recommend being especially careful with dormant companies that have ceased filing statements, despite the requirement to do so. In those cases the Administration can claim the company debt against the directors.
In all of these assumptions of tax liability, the Civil Code says that the director shall be liable for the tax debt with his present and future assets.
For all of these reasons, it is very important to be well assisted when accepting or seeking a directorship for a company. Equally important is having good advisors to assure the correct and punctual fulfillment of all the accounting, fiscal, and legal obligations of the company. This will help avoid unpleasant surprises.