The Russian Constitutional Court and the Russian Federal Tax Service: Rules for holding individuals liable for companies’ tax debts

In Resolution No. 39-P the Constitutional Court assessed the case law with respect to imposing civil law liability on a taxpayer’s officials in the form of the compensation of damage caused by a tax crime.

Please find below the basic provisions of the Constitutional Court’s legal position and of the Federal Tax Service's interpretation of it.

Recovery of a company’s tax debts from individuals is recognised to be in line with the Russian Constitution

The Constitutional Court has recognised that article 31(1)(14) of the Russian Tax Code (the’ Tax Code’) and article 15 and article 1064(1) of the Russian Civil Code (the ‘Civil Code’) do not contradict the Constitution and allow amounts of tax debts and default interest that a corporate taxpayer has not transferred to the relevant budget to be recovered: (i) from individuals who have been convicted of crimes that have caused such tax debts; or (ii) from individuals against whom a criminal prosecution has been terminated on non-exonerative grounds. The specified amounts are to be recovered under claims, raised by prosecutors and by tax authorities, to recover damage caused to public-law entities.

The conditions for damage caused by a tax crime to be recovered from individuals

Clarifying the constitutional and legal sense of the above provisions, the Constitutional Court specified that the recovery from individuals of damage caused by a tax crime is allowed if the following conditions are met:

• all of the elements of a civil law offence must be determined;
• data regarding the termination of the corporate taxpayer’s activity should be entered into the Unified Register of Legal Entities or a court should determine that the company in question is actually a dormant company and/or that it is impossible to recover debt from it or from parties held liable for its debts under the provisions of tax and civil legislation, or that a corporate taxpayer serves as a ‘cover’ for the actions of the controlling person.

Clarifying the moment when the opportunities to recover debts from a corporate taxpayer are exhausted, the Federal Tax Service provides a list of circumstances at least one of which is considered sufficient, including such ambiguous circumstances as:

• the Unified Register of Legal Entities contains data marked as inaccurate;
• a tax authority or another person (a court-appointed administrator or an expert) carries out an analysis of the company’s financial and business state that determines that mandatory payments cannot be made;
• there are no grounds or there is insufficient evidence for damage to be recovered from the parties held liable for the company’s debts.

In acknowledging that contentious provisions of the law are in line with the Constitution, the highest court tried to establish limitations under which the application of the liability mechanism in question would be exceptional. However, the above list creates conditions for the tax authorities to be able to recover damage from individuals before other protection methods stipulated by the special legislation have been implemented in full.

The amount of individuals’ liability

The Constitutional Court has recognised that no fines for tax offences, but only tax debts and default interest can be recovered from individuals.

At the same time the Federal Tax Service believes that fines may be claimed from individuals for the benefit of a corporate taxpayer as losses in accordance with the provisions of article 61.20 of the Law on bankruptcy, including if there are no bankruptcy proceedings.

The possibility to reduce the amount of damage to be compensated by the individual

The Constitutional Court has recognised, as a type of legal liability, the material specific nature of the legal relationships involving an individual recovering the damage caused by a tax crime. In addition, the Constitutional Court has specified that in order to determine the amount of damage to be recovered in disputes of this type the court may take into account:

• the financial position of the individual (including whether the committed tax crime has resulted in enrichment);
• the extent to which the individual is at fault;
• the nature of the criminal penalty;
• other material circumstances.

The tax authority stipulates that the regional authorities should consider that such indirect circumstances as those stated below are confirmation of enrichment that has actually resulted from the tax crime:

• the level of the financial condition of the defendant and of his/her related persons has changed;
• the expenses of the defendant and of the persons related to him/her exceeded their official income in the period during or after which the crime was committed;
• there are substantial assets but no proved sources from which such asserts originated;
• the legal entity’s funds have been directly or indirectly transferred to an anonymous beneficial owner (including to structures in foreign jurisdictions);
• any other direct or indirect financial interest, profit and other benefits and property;
• there is another personal interest as a motive for the crime (including self-advancement, protectionism and nepotism).

Moreover, the Federal Tax Service believes that the amount of damage to be recovered is not subject to reduction if the individual has been awarded a punishment that does not involve imprisonment and the extent to which an individual is at fault may be reduced only if there are other parties at fault to whom the relevant part of the financial liability may be shifted.

The strict thrust of the clarifications provided by the Federal Tax Service is the aim to actually recover tax debts from individuals. This significantly complicates the legal proceedings regarding the recovery of damage and demands significant effort to reject the increasing body of evidence from the tax authorities.

Reducing the amount of liability if the damage has been caused intentionally

The Federal Tax Service (referring to article 1083(3) of the Civil Code, which was not considered by the Constitutional Court) stipulates that regional authorities should proceed on the basis that the amount of damage to be recovered may not be reduced, including when an individual’s financial state is taken into account, if there are signs in the individual’s actions of guilt in the form of intent.

The application of article 1083(3) of the Civil Code in the cases in question without taking into account the legal position described in Resolution No. 39-P of the Constitutional Court, practically nullifies the few conclusions of the Constitutional Court that are positive for parties that are held liable since the tax crimes provided for by articles 199, 199.1, 199.2 of the Russian Criminal Court provide for intentional guilt.

The burden of proof and the significance of a verdict in a criminal case

According to the legal positions of the Constitutional Court, the court cannot treat the actual handing down of a guilty verdict or termination of a criminal case as the fact that definitively confirms that the defendant is guilty of causing the damage.

However the Federal Tax Service emphasises that in civil proceedings the party which caused damage is presumed to be guilty and bears the burden of proving that he/she is not guilty. At the same time the clarifications contain a list of cases when it is not mandatory to identify all of the elements of a civil law offence and to analyse all of the circumstances of the tortious act, including:

• the issue of the civil claim is settled simultaneously with the handing down of a verdict in a criminal case;
• there is a court verdict that has come into effect owing to its prejudicial nature.

The applicability of the legal position of the Constitutional Court to other disputes

Taking in account that the practice of holding individuals liable for companies’ obligations (not only for tax obligations) is common, that the claimed amounts are expressly disproportionate to the financial capabilities of individuals and that there are no fundamental differences between the nature of liability for the losses caused by the crime, it is possible not to limit the application of the legal position of the Constitutional Court described in Resolution No. 39-P only to cases when the damage caused by a tax crime is to be recovered.

The current procedural legislation provides for the opportunity to review court judgments handed down not only with respect to the individuals that raise claims in constitutional proceedings if a number of conditions are met. In particular, the decision must not be enforced even partially. Moreover, importance also attaches to the specifics of the industry to which the provisions relate that are reviewed by the Constitutional Court in terms of their being in line with the Constitution. According to the general rule, the grounds for a review are that the legal positions relate to public law rules. Nevertheless, proceeding on the basis of the essence of legal relationships involving the recovery of damage caused by a tax crime provided for by the Criminal Code, we have identified grounds for a statement of claim to be filed to have decisions reviewed further to new circumstances becoming known with reference to the position of the Constitutional Court described in Resolution No. 39-P. The deadline for such statement of claim to be filed expires on 12 March 2018.

Conclusions

Resolution No. 39-P of the Constitutional Court allows a company's tax debts to be recovered from individuals who have committed tax crimes. However, the resolution in question prescribes that courts take a more balanced approach to the issue of whether there are grounds to recover the debts and whether there is any possibility to reduce the amount of damage to be reimbursed by an individual.

At the same time, the Federal Tax Service’s official interpretation of some points of the Constitutional Court’s legal position is not in line with the sense and nature of the clarifications of the Constitutional Court. The Federal Tax Service’s interpretation allows us to predict an increase in the number and complexity of such disputes.

Taking into account the active position of the tax authorities when tax debts are recovered regardless of the amount of such debts as well as the complexity of defence in this category of cases, there are significantly increased risks that employees, managers and controlling persons of companies will be held liable for violating the requirements of tax legislation.

Help from your adviser

With their extensive experience of success in protecting the interests of all categories of parties involved in the procedures carried out in a bankruptcy case, Pepeliaev Group’s experts provide legal support in court proceedings (among other things) with respect to secondary liability being imposed and the recovery of losses and damage that has been caused by legal entities' non-performance of their obligations, including tax obligations.

We are ready to assess the prospects of achieving a review of court judgements ordering the recovery from individuals of companies' debts as losses, to prepare a position, and to provide any other qualified legal assistance.