Personal Liability of the Managing Director for Trade Tax
Managing directors of a GmbH must ensure that the company properly fulfils its tax obligations. This does not apply only to tax claims that are already due. Foreseeable future tax burdens may also have to be taken into account when using available funds.
The Verwaltungsgerichtshof Baden-Württemberg (VGH Baden-Württemberg, Higher Administrative Court of Baden-Württemberg) ruled in its judgment of 10 October 2024 that a breach of this duty to make provision for funds may lead to the managing director’s personal liability (case no. 2 S 1297/24). The proceedings concerned liability for trade taxes of a GmbH and were published, among others, in NWB 51/2024, p. 3573 and in GmbH-Stpr 2024, p. 223.
Trade Tax Claims Against a GmbH
Additional Assessments Following an External Audit
In the case decided, a municipality had assessed trade tax against a GmbH. The company operated an iron-fixing business, provided construction services in the form of reinforcement, steel bending and steel mesh work, and distributed steel reinforcement.
In the course of a later audit, substantial income of the company was identified that had not been properly recorded in the accounts. According to the published information, this involved revenues of around EUR 500,000 that had been booked through other accounts and partly withdrawn in cash. The concealed revenues were uncovered by the Finanzkontrolle Schwarzarbeit (financial control unit for undeclared work).
According to the additionally published descriptions of the decision, around EUR 350,000 flowed into a private account of the managing director’s wife. Further amounts are said to have passed through an unrecorded account. The tax audit also identified accounting deficiencies, including missing electronic cash register data for the cash ledger.
Liability Notice Against the Managing Director
On the basis of the facts established, the trade tax assessments were increased. At that point, however, the GmbH no longer had sufficient funds to satisfy the claims. Enforcement of the trade tax claims against the company was unsuccessful.
The GmbH had been dissolved on 17 January 2017. The later debtor under the liability notice was appointed liquidator. The municipality subsequently held him personally liable by way of a liability notice.
According to the published information, the liability amount was EUR 41,546.26. It related to trade taxes for the years 2010 to 2013. The managing director argued that the GmbH had no longer been solvent at the time of the increased tax assessment.
Decision of the VGH Baden-Württemberg
Former Managing Director’s Appeal Was Unsuccessful
The VGH Baden-Württemberg dismissed the former managing director’s appeal. In the court’s view, the decisive factor was that the managing director had culpably breached his duty to make provision for foreseeable tax liabilities.
The court focused on the fact that the managing director had to expect trade tax on the undeclared income. The available funds therefore should have been handled in such a way that the later foreseeable additional trade tax payments could be met.
According to the published commentaries on the decision, the decisive allegation was that no reserves had been formed for the foreseeable tax claims in economically successful years. The VGH classified this as gross negligence.
Duty to Make Provision for Funds Before Due Date
The decision makes clear that the duty to make provision for funds may become relevant even before a tax claim actually falls due. It is therefore not sufficient in every case to look only at the liquidity situation at the time of the later tax assessment.
The officially reported guiding principle states that a managing director breaches his duties if, by satisfying other creditors in advance or in another manner, he culpably makes it impossible for the GmbH to settle tax debts falling due in the future.
The decisive issue is therefore not exclusively whether funds were still available when the amended tax assessment notice was issued. Rather, what may be decisive is whether the later tax burden was already foreseeable and whether available funds had previously been used elsewhere.
Legal Basis of Liability
Duties Under § 34 AO
Under § 34 AO (Abgabenordnung, German Fiscal Code), the legal representatives of a GmbH must fulfil its tax obligations. This includes, in particular, the proper filing of tax returns and the payment of taxes from the funds they manage.
In this capacity, managing directors are not themselves the tax debtors of the GmbH. However, under certain conditions, they may be held personally liable for tax claims if breaches of duty result in a tax shortfall.
Liability Under § 69 AO and Liability Notice Under § 191 AO
Personal liability may arise under § 69 AO (German Fiscal Code) if the persons referred to in § 34 AO (German Fiscal Code) intentionally or with gross negligence breach their duties and, as a result, tax claims are not assessed or satisfied, or are not assessed or satisfied in due time. Recourse is taken by way of a liability notice under § 191 AO (German Fiscal Code).
For liability to arise, the following requirements in particular must be considered:
- a tax obligation of the managing director,
- an intentional or grossly negligent breach of duty,
- a tax shortfall or delayed satisfaction of the tax liability,
- a causal link between the breach of duty and the shortfall,
- recourse by way of a liability notice.
In this context, the VGH Baden-Württemberg clarified that adequate causation is required between the breach of duty and the tax shortfall. This is absent if the tax shortfall would in any event have occurred because of a lack of funds and the absence of enforceable assets.
In the case decided, however, the managing director was not assisted by the reference to the GmbH’s later lack of funds. In the court’s view, the tax burden had already been foreseeable when funds were still available.
Significance of the Company’s Financial Development
Presentation of the Liquidity Situation
If a managing director argues that, despite existing earnings, no funds could have been set aside for foreseeable tax claims, the company’s financial situation must be presented in a comprehensible manner and, where necessary, substantiated with evidence. This concerns in particular the question of which funds were available at which time and for what purpose they were used.
The decision shows that the GmbH’s later insolvency does not necessarily rule out personal liability. What matters instead is whether the shortfall in the tax claim is attributable to a culpable breach of duty by the managing director.
Continuation of the Case Law in Interim Proceedings
The VGH Baden-Württemberg continued its approach to the duty to make provision for funds in later interim proceedings. There, the complaint against a municipal trade tax liability notice was rejected because there were no serious doubts as to its lawfulness.
In this respect as well, the case law confirms that the duty to make tax-related provision for funds does not necessarily arise only when the tax claim formally falls due. The circumstances of the individual case remain decisive, in particular the foreseeability of the tax burden and the use of the company funds available.
Personal Consequences for Managing Directors
Liability for a GmbH’s tax debts can have significant personal financial consequences. It is not linked solely to the existence of a tax claim, but rather to a breach of duty by the managing director in connection with the company’s fulfilment of its tax obligations.
In the dispute, the decisive factor was that, in the court’s view, the additional trade tax assessments were foreseeable and yet no sufficient provision had been made. The personal recourse did not concern all of the GmbH’s liabilities, but the specific amount of EUR 41,546.26 asserted by liability notice for trade taxes for the years 2010 to 2013.
The decision makes clear that the use of company funds in favour of other creditors or for other purposes may become relevant under liability law if this prevents the later satisfaction of foreseeable tax claims.
Classification for Tax Law Practice
Personal liability under §§ 34, 69 AO (German Fiscal Code) may already be linked to events that occur before the tax claim falls due. The decisive factors are, in particular, foreseeability, use of funds, degree of fault and causation of the tax shortfall.
For managing directors and shareholders, such scenarios may give rise to a considerable need for clarification, especially in the context of tax audits, amended tax assessment notices or liability notices issued by municipal tax authorities. MTR Legal Rechtsanwälte advises companies, corporate officers, investors and high-net-worth individuals on tax law matters; further information can be found at Legal advice in tax law.
