May-Haz 2019

Taxational Liability Of Directors Of Joint Stock Companies

Turkish Commercial Code numbered 6102 has made changes in the settlement of Joint-Stock Companies and responsible system of board members to creditors, the company and each other. These changes have also caused some differences in the tax liability of the board members. The conditions of the keeping the board members responsible for tax debts and remedies for board members facing legal and administrative sanctions, are examined in the scope of this article.

In recent years, there has been an increase in the number of capital companies established as joint stock companies; this number is expected to increase further considering the provisions of the Turkish Commercial Code no. 6102, which can be defined as far from limitation, in accordance with the provisions of the Code suitable for professional management. The most important factor in the selection of the title ‘Taxational Liability of the Directors of Joint Stock Companies’ is the necessity of examining the effect of the changes in the system of liability of Directors towards creditors, the company and to each other with the structuring of joint stock companies by Law no. 6102 on the tax liability of the Directors, since, in the context of tax law, entities which are taxpayers or which are liable to pay tax are obliged to use the provisions of the Turkish Commercial Code to determine the legal and penal liability arising from their failure to fulfill their tax duties properly.

Although the essence of the tax law is the collection of the tax law from the taxpayer, over time, the necessity has arisen, to collect taxes from third parties who are connected to taxpayers within the framework of certain rules and this situation has revealed the concept of tax liability. One of the reasons why the concept of tax liability is needed is to ensure that the legal entities who do not have a physical presence and mobility as product groups are able to fulfill their duties in a timely and complete manner if they are taxpayers.2 For this reason, Article 10 of the Tax Procedures Code imposes an obligation on legal representatives of legal entities to fulfill the tax duties for legal entities and regulates that the legal representatives shall be responsible for any neglect in these duties. Since joint stock companies are also subject to this regulation as a type of legal entity in the form of trading company, tax duties on joint stock companies will be carried out by the members of the board of directors, in their capacity as individuals liable to pay tax.

Receivables collectible according to Article 10 of the Tax Procedures Code, are taxes and tax-related receivables as well as tax penalties with reference to paragraph 2 of Article 333 of the Code. In the case of any receivable other than tax and tax-related receivables and tax penalties, the collection of such receivable from the members shall be made in compliance with repeated Art. 35 of AATUHK. In addition to performance of the collection of public receivables other than tax receivables in accordance with this Code, AATUHK is also important for us in the implementation of tax receivables in the follow-up and collection phases stages after accrual.

The first condition of holding the members of the board of directors as a legal representative responsible for the tax liability of a joint stock company primarily is to prosecute the Company and failure in collecting all or any part of the tax and related receivables from the company assets.  As to the doctrine with that respect, the State Council has conflicting decisions in this regard, whether the form of handling of Article 3 of the AATUHK, which gives the definition of uncollectible public receivables, recognizes the discretionary authority of the administration in this regard and whether it is necessary to have an insolvency certificate in the prosecution performed on behalf of the principal debtor in order to issue payment orders on behalf of the legal representative. However, considering the tendency of the Administration to recourse directly to the liability of the legal representative without taking into consideration the conditions of application of the provision of Article 10 of the AATUHK, it would not be appropriate to say that the provision of Article 3 recognizes the discretion of the Directors the board of directors of the joint stock company within the scope of the liability of tax and taxable receivables; a comment otherwise would mean approximation of Art. 10 of the Tax Procedures Code and Art. 35 of AATUHK  and jeopardizing the legal protection provided by Art. 10 of the Tax Procedures Code to the legal representative.

The second condition of the responsibility is the failure of the Director to fulfill his duties as an individual responsible for tax. The liability imposed on Directors of a joint stock company in Article 10/2 of the Tax Procedure Code arises from failure in fulfillment of taxational duties imposed on such persons in the first paragraph of the Article. In order for a Director to be held accountable for not fulfilling the tax duties of the company, the Director must have the authority to represent (broadly), in other words, the authority and power to fulfill the tax duties and pay the tax debt on behalf of the legal entity. Since the title of legal representative is a superscript that refers to the organ that holds the representation and/or administrative powers of the joint stock company, it is not correct to associate this title with the authority of representation only. It should be noted that the fulfillment of tax duties is included in the administrative part of the statutory representation, and only the company's registered and announced circular of authorized signatories should not be used when determining the legal representatives responsible for fulfilling the tax duties.

Whether the Directors are in defective behavior in the performance of their duties shall be determined in accordance with the provisions of the Turkish Commercial Code, which regulates the responsibility and diligence of the Board of Directors, as the Tax Procedures Code lacks to mention of the principles regarding the determination of the defect. In this context, the board of directors remains responsible within the framework of senior management and senior supervision principles, even if the fulfillment of tax duties is left to the managing director or executive managers. In order to have tax duties fulfilled as required, the Directors members of the board of directors should direct the persons taking over the authority by giving instructions when necessary; otherwise, the board of directors shall be responsible. The Board of Directors shall not have any responsibility for the transferred works, if care has been taken in the selection of the managing directors, the transfer is duly carried out, and instructions are given when necessary and the supervisory duty has been fulfilled as required.

Although the board of directors is the legal representative of the company as an organ, it is not possible to hold all members unconditionally responsible for the liability. The duty to fulfill the tax duties is not one of the non-transferable duties and powers of the board of directors. Within the framework of a professional management approach, this task may be delegated to one or more members of the Board of Directors or to third parties outside the Board of Directors. In the event of transfer of duties and powers related to fulfillment of tax duties, the title of legal representative shall be assigned to individual(s) assigned and authorized to perform this task; individuals who are members of the Board of Directors, but who do not have the duties and powers to fulfill their tasks shall not be held responsible for non-fulfillment of such tasks. If no special arrangement has been made on this matter and if one or more members or third parties have not been charged with the fulfillment of tax duties, the Board of Directors shall be held responsible in case of a possible debt. Although in the doctrine, some authors state that special contracts for taxpayers or tax liability will not bind tax authorities, except in cases where the Tax Procedures Code is adopted by tax laws, they argue that the responsibility of the transferring members of the board of directors still maintains relying on the aforementioned grounds, the source of the transfer of authority is not the contract but the regulations of the Turkish Commercial Code and therefore this opinion does not find many supporters.

The authority and power of a Director of a joint stock company to fulfill tax duties and pay the tax debt on behalf of the legal entity is closely related to the term of office of the Director. The liability under Art. 10 of the Tax Procedures Code covers the periods of taxation between the dates at which the title of legal representation is acquired and lost. The discussion here pertains to the effect of registration and announcement in the trade registry in determining the term of office. In an opinion, it is argued that tax liability of the legal representative under Art. 10 of the Tax Procedure Code shall continue until the date of registration and announcement in the trade registers, whereas another opinion alleges that the actual situation should be acknowledged. It is generally accepted that due to the fact that a Director whose term of office is terminated is deprived of the authority to attend company meetings or directly access to the company information and documents in order to fulfill the duties of a legal representative, the Director deprived of his authority to fulfill tax duties of the Company upon actual resignation from the Board of Directors shall not be held liable for taxes not recovered from the Company and other receivables related thereto under Art. 10 of the Tax Procedure Code.

The third and final condition of liability is the causality link. With the amendment made in the Article 10 of the Tax Procedure Code no. 3505, the obligation of tax offices to prove the intentional act and neglect of the legal representative has been abolished and it has become sufficient to put forward that there is a causality link between failure in fulfilling tax tasks and failure in recovering all or any part of the tax debt from the assets of the company. Accordingly, although the direct reason of failure in recovering is the insolvency of the joint stock company, which is the principal debtor, the indirect reason should be failure in timely and fully performance of tax duties.

Due to the absence of a special provision regulating the subject of succession in the Tax Procedure Code and in AATUHK, it is necessary to benefit from the relevant provisions of the Turkish Commercial Code (TTK) and the Turkish Code of Obligations (TBK) in determining the principles of internal and external succession which the joint responsibilities of the Directors who do not fulfill the tax duties of the joint stock company shall be subject to.

In the event that more than one legal representative Directors is responsible for the non-payment of the tax debt, it was possible under the regulation of the Turkish Commercial Code no. 6762, for the tax authority to claim all of its receivables from one or more or all of the board members regardless of the defect rates; however, the Turkish Commercial Code no. 6102 regulates the joint responsibility in a manner different from the abolished Turkish Commercial Code No. 6762. Article 557 of the Turkish Commercial Code no. 6102 has adopted the principle of a “differentiated succession” which allows the persons who are considered to have responsibility to assert that their fault is less or different than others in the external relation. According to this principle, each of the responsible individuals may be held severally liable, together with others, to the extent that the damage can be attributed to them according to the defects of the concrete event and the requirements of the situation. With this regulation of the Turkish Commercial Code No. 6102, it is suggested in the doctrine, that in order to held the Directors severally liable, it is necessary to prove that these individuals have committed the same fault together in the same concrete event and that the tax judge responsible for resolving the dispute is obliged to act ex officio in accordance with the differentiated succession principle.

Art. 10 of the Tax Procedure Code clearly states that legal representatives can recourse to the legal entity, who is the principal debtor. Based on this provision, the legal representative who has paid tax debts of the Company is considered to have the right of recourse to the company, even if it is defective, regardless of the condition, but the content of this right is controversial in the doctrine. Some authors argue that recourse is granted only for the original tax and that board members do not have the opportunity to apply for tax-related receivables and penalties. Another author acknowledges the right of recourse for non-tax payments. In the face of the regulation in the Tax Procedure Code that the liability of legal representatives is to be based on a fault, it seems more appropriate to accept that legal representatives shall not have the right of recourse to the Company if the members of the Board of Directors cause, with their defective actions, the Company to encounter a tax fine or lead to emergence of tax related receivables.

A Director who is obliged to pay tax receivables that cannot be recovered from the company may apply to the other Directors who have responsibility with that respect. In this action to be filed in related jurisdictions, the judge must examine in detail position of the Directors and the duties and authorities regarding the payment of receivables, whether duties have been distributed among Directors, and whether the contribution of all Directors are at the same level in terms of contribution to failure in recovering the tax receivables from the Company. The Court of Cassation makes the demand of legal representatives from other person liable, other than the principle debtor conditional to impossibility of collection of the amount paid from the main taxpayer. 

In the settlement of tax disputes, there are two different options, namely, administrative and judicial solutions. Although there is no regulation in the Tax Procedures Code that clearly shows the rights and powers of the taxpayer, Art. 8/4 of the Tax Procedures Code states that all the rights and powers contemplated for taxpayers in the Code will be valid also for individuals having tax liability and therefore it must be accepted that Directors may also apply to judicial remedies as individuals liable for tax. Since the administrative remedies are not regulated as a prerequisite for applying to the judicial remedy, a Director who has tax liability can apply directly to the judicial remedy or he may apply to administrative remedies primarily and failing to have any result in this way, he can apply to judicial ways if the time allowed for application continues.

Some of the regulations regarding the settlement of tax disputes by administrative procedures are directly included in the Tax Procedures Code. These are reconciliation, penalty reduction and correction institutions. In addition to these provisions in the Tax Procedures Code, the Ombudsman Institution which is included in our legal system via the Law No. 6328 and, the Statutory Decree No. 659 on “the Execution of Legal Services in Public Administrations and Special Budget Administrations within the scope of the General Budget”, and “peace” opportunity are the ways of administrative application.

In the practice, when it is considered that the responsibility conditions of the legal representative have been fulfilled, a payment order is issued and notified by the administration according to the Art. 10 of the Tax Procedure Code. In order for the legal representative board member to be followed up in accordance with the provisions of Article 10 of the Tax Procedure Code, the tax liability must be duly passed through the stages of accrual, notification and notification. When the payment order is subject to the case by the member of the board of directors, the court makes search whether the conditions specified in the Art. 10 of the Tax Procedure Code are fulfilled or not. If the end of this search the court decides that the conditions are not fulfilled, then the court cancels the payment order. In case of a lawful arrangement, the case is rejected and the proceedings keeps going. A member of the board of directors who has taken a case against a lawsuit also has the opportunity to review and change the decision of the tax court by operating the legal remedies.

Attn. İrem Erkoç