On August 4, 2017, the Law on amendment and supplement of the Tax and Social Insurance Procedure Code (TSIPC)¹ was promulgated in issue 63 of the State Gazette. The amendments to Art. 19 of the TSIPC – “Liability of a Third Party” are among the more significant changes introduced. Some further amendments to the said provision have been made with issue 92 of the State Gazette, dated November 17, 2017².

The provision of Art. 19 of the TSIPC sets forth the liability of third parties for outstanding public debts of the liable persons under Art. 14, par. 1 and par. 2 of the TSIPC – legal entities, liable to taxes and/or compulsory social insurance contributions or persons, obligated to withhold and remit taxes or compulsory social insurance contributions. The said provision is aimed at ensuring proper collection of outstanding debts of companies through engaging the personal liability of third parties who have undertaken actions in bad faith to impede such proper collection.

Various instances have been identified by the National Revenue Agency aimed at impeding the process of proper collection of debts for taxes or compulsory social insurance contributions – by undertaking in bad faith actions for diminishing or encumbering the property of the companies in a way that the latter are no longer able to meet their tax or social insurance obligations to the NRA.

The amendments to Art. 19 of the TSIPC have been introduced for the purposes of improving the efficiency in applying the current regulatory framework, as well as for optimizing the legal proceedings and clearly defining the objective and subjective preconditions to be proved in order to engage the subsidiary liability under Art. 19 of the TSIPC.

In particular, amendments refer to the following:

A. The circle of third parties bearing personal liability for outstanding debts of another person has been extended by including in its scope:

owners of the capital for certain actions undertaken in bad faith and based on a decision that they have supported with their vote;

persons acting in hidden complicity with the debtor company;

persons exercising management functions without officially being registered as managing bodies.

The hidden complicity is an institute of commercial and civil law. In tax law the person acting in hidden complicity tries to enjoy rights by accumulating uncollectible tax and social insurance obligations which he is not formally holder of. The regulation provided for in par. 8 simply aims at ensuring better clarity and indisputability – since legal basis for engaging the liability of persons acting in hidden complicity had existed even before the amendments were introduced but needed to be based on interpretative argumentation.

Tax or social insurance abuses often involve using the name of a person owning no personal property – to be formally registered as a director but without having any actual management functions. Such management functions are exercised by other persons (the actual owners of the companies). By virtue of par. 12, defining such other persons as procurators and commercial proxies, the law explicitly sets forth their liability for actions under par. 1 and par. 2.

B. The circle of actions or omissions preconditioning the engagement of liability has been extended by including:

receiving hidden profit distribution;

transferring shares or holdings from the capital of an over-indebted or insolvent company when being aware of such circumstances³.

Hidden profit distribution had been grounds for applying Art. 19 of the TSIPC towards the persons who had effected the payments even before the amendment was introduced – the latter now provides legal grounds for engaging the liability of the persons who have received the respective payments from the property of the indebted company (in kind or in cash) constituting hidden profit distribution.

The provision of par. 5 does not introduce to acting in good faith shareholders any restrictions on the free transfer of their stocks and shares – it is solely aimed against acting in bad faith shareholders trying to unlawfully preserve their commercial reputation and thus keeping the opportunity to undertake in future other business activities without third parties being aware of the actual situation.

C. The amendments introduce evidentiary rules in the proceedings for applying the liability under Art. 19 of the TSIPC – by introducing assumptions of bad faith.

Taking into account the fact that subjective attitude of a person is hard to prove, the law provides for certain statutory irrefutable assumptions of bad faith. The assumptions will not cover situations where the factual circumstances of the case fall beyond their parameters – for such actions of bad faith, damaging the property of the company and having causal connection to the impossibility to recover the debt, the general evidentiary rules of the TSIPC should be used.

Generally, I find it well justified to introduce legal measures for protection against persons who in bad faith impede the successful collection of public obligations for taxes and social insurance contributions. It is important, however, not to affect the fundamental concept of limited liability, which in turn may lead to other negative consequences, such as the occurrence of inadmissible barriers to the transfer of shares and stocks and imposition of restrictions on the free movement of capital. Practice will show if and to what extent a fair balance has been found between the fiscal interests of the state and the interests of business and economy.