Tax evasion: A CEO may be held liable for actions of his employees

Criminal law is clear: Only those who have acted with intent are sentenced and punished for tax evasion (§ 370 AO [Fiscal Code]). If there is no intent, a fine will apply at most. However, this is different with regard to liability of directors and officers of companies pursuant to tax laws. The financial court of Mecklenburg-Vorpommern (judgment of 10/19/2016, file no.: 3 K 93/13) decided that a managing director of a limited liability company may also be personally liable for tax evasion committed by employees of the company if he had no knowledge of their actions, but could have detected and prevented the same through careful supervision.

Unfortunately, the grounds cannot be denied: It is true that the managing director of a limited liability company is not obligated to deal with all tax matters of the limited liability company himself, without restrictions. He can (or if he lacks the expertise, must) transfer these duties to expert third parties, such as employees. However, he must then supervise them carefully on an ongoing basis. Specifically, he must familiarize himself with business transactions in such detail that he can, under normal circumstances, expect the proper completion of transactions and detect faulty behavior of employees in time.

If the managing director violates this supervisory duty, this generally constitutes gross negligence according to the fiscal courts. The managing director is then fully liable for the company’s tax debt arising from tax evasion by the employee. Managing directors should therefore strictly fulfill their supervisory duties – both with regard to tax law and other fields. In larger units, it is recommended to establish a compliance system for this purpose.