Cyprus Company Law: Responsibility of Directors for the non-payment of taxes
A Company Director, in a company incorporated under the laws of the Republic of Cyprus, may be found liable by the Inland Revenue or Customs & Excise with regarding tax related issues. As per the legislation, the Inland Revenue or Customs & Excise may personally prosecute the Company Directors who are involved in any taxation offence(s) or related financial matters.
The line between legitimate tax avoidance and tax evasion is thin and thus, both companies and their Directors must be very careful when entering into any transaction or concealing any matter from the tax authorities. Companies and their Directors have a legal obligation to provide the tax authorities with accurate and no misleading information.
Breach of such obligation may lead to civil penalties and interest charges. However, the Inland Revenue as well as Cyprus Customs & Excise have the power – for serious breaches and offences - to bring a criminal proceeding against the Company Director as an individual (and not only against the Company itself) who is involved in tax evasion, either personally or through their companies.
Under current legislation, there is no offence of «tax evasion» as such; however the evasion of tax by deceitful means represents fraudulent conduct. The three possible channels of prosecution will include cheating public revenue, false accounting and conspiracy to defraud.
Although the Inland Revenue and Customs & Excise have the power to prosecute the Company Director, in the majority of the cases, they will give the opportunity to the individual to «come clean» provided that full disclosure is made. Hence, a criminal prosecution is unusual and the Inland Revenue will rely mostly upon civil penalties (such as administrative fines).
However, it is worth mentioning that the Inland Revenue is inclined to bring a criminal proceeding against a professional adviser, who helps a client to evade tax. In such instances, the Inland Revenue will find the professional adviser liable for a conspiracy related charge if he/she takes any action and/or gives advice to any client in order for him/her to evade tax and avoid compliance with his/her tax obligations.
Legal Grounds – Legislation
(A) The Value Added Tax (VAT) Act of 2002
VAT legislation imposes a strict liability in the Company Director. Sections 53(1) and s54 of the Cyprus VAT legislation state that if a legal entity is guilty of any of the offences referred to in the law, responsibility of such an offence except from the legal entity is also with (a) all the members of the board of Directors of the company and (b) the General Manager or the Director or the Chief Executive Director of the company.
Apart from criminal liability (fine and/or imprisonment of at least 2 years) under Section 55 of the VAT legislation, Directors also bear civil liability for any tax that is payable by the company to the state.
It is remarkable that under VAT legislation, even if the particular Director did not have the intention to act unlawfully, he will still found to be criminally liable.
(B) Assessment & Collection of Taxes Law
Based on the Memorandum of Understanding between the Republic of Cyprus and the Troika; the House of Representatives voted for specific amendments to the Assessment and Collection of Taxes legislation. With the amendments made to Section 51A, the following apply:
For taxes that are withheld at source (IT, Special Contribution for Defence (SDC) and SC) one can be charged as guilty in case of delays in paying such a tax without having to prove to the Court that the offender was fraudulent.
Furthermore, the applicable prison sentence and fines increase as follows:
|Or imprisonment for a minimum of:||-||Two years|
|Or both||-||€5,000 & two years imprisonment|
If the offence of non-payment or delay in payment is committed by a legal person, then the following people are also responsible for committing the offence in addition to the legal person:
- The Managing Director,
- The members of the Board of Directors and
- Any other officer who exercises financial management duties for the legal person or any other person that is allegedly acting in any such capacity.
For taxes that are withheld at source, any of the persons referred to above can be charged as guilty in case of omission or delay in the payment of such a tax without having to prove to the Court that the offender acted in a fraudulent manner.
In case of conviction, they are subject to penalties and imprisonment as follows:
- for a total amount of tax due not exceeding €1,700, a fine of up to 20% of the tax due and
- for a total amount of tax due exceeding €1,700, a fine of up to 20% of the tax due or imprisonment not exceeding two years or both.
In addition, the Assessment and Collection of Taxes laws were amended so that in the event where a person fraudulently or deliberately submitted an inaccurate declaration/inaccurate accounts/information as well as in the event where a person who collaborates/assists/advises/abets or urges submitting such information is a legal person, then the Executive Director, the members of the Board of Directors and any other officer which has duties relating to the financial control of the legal person or any person who appears to be acting under such capacity, are deemed to participate in the commission of an offence and are guilty of such, provided that it is proved that they fraudulently collaborated in the commission of the offence.
Under the existing law, a person who commits any offence as described above is liable, upon conviction, to a fine not exceeding 17.860 Euros and/or to a prison sentence for a period not exceeding five years. In case of conviction of a person who intentionally or knowingly submits inaccurate declaration/inaccurate accounts/information, that person is obliged to pay the taxable amount due and a fine not exceeding four times the amount of the additional tax.
(C) Cyprus Criminal Code
Article 311 of the Cyprus Criminal Code states: “Any person who a) being a Director or officer of a corporation or company, receives or possesses himself as such of any of the property of the corporation or company otherwise than in payment of a just debt or demand, and with intent to defraud, omits either to make a full and true entry thereof in the books and accounts of the corporation or company, or to cause or direct such an entry to be made therein, or b) being a Director, officer or member of a corporation or company, commits any of the following acts with intent to defraud, that: i) Destroys, alters, mutilates or falsifies any book, document, valuable security or account which belongs to the corporation or company or any entry in any such book, document or account or is privy to any such act; or ii) makes or is privy to making any false entry in any such book, document or account, or, iii) omits or is privy to omitting any material particular from any such book, document or account is guilty of a felony and is liable to imprisonment of 7 years”.
(D) Cyprus Securities and Exchange Law
In the case of listed companies, the criminal liability of Directors may arise under the Cyprus Securities and Stock Exchange Law. Section 189 of the Cyprus Securities and Stock Exchange Law states that “anyone who, in the course of providing information for any of the purposes of this Law or the Stock Exchange Regulations, makes a statement which is false, misleading or fraudulent with respect to a material element of it or conceals anything material commits an offense which is punishable by imprisonment of up to two years or by a fine of up to five thousand pounds or by both penalties”.
It is also important to note that under Cypriot law it is possible for both the company and the director or individual offender to be convicted. Under Article 190 (2) of the Cypriot Securities and Stock Exchange Law “Persons who, according to the provisions of the preceding subsection, incur criminal liability for offences committed by a legal person are jointly and severally liable with the legal person for any damage caused to third parties as a result of their action or omission which constitutes the offence”.
Criminal prosecutions for offences committed in relation to the Cyprus Stock Exchange Laws and Regulations N.14(I)/1993 may only be instigated by the Attorney General of Cyprus or with his consent.
In conclusion, many statutes have included the following section in order to prevent Company Directors to hide behind the corporate veil and the privilege of limited liability:
“Where an offence…committed by a body corporate is proved to have committed with the consent or connivance of, or to be attributable to any neglect on the part of any director, manager, secretary or other similar officer of the body corporate or any person who was purporting to act in such capacity, he as well as the body corporate shall be guilty of that offence and shall be liable to be proceeded against and punished accordingly.”
Example of such statutes are the Consumer Credit Law 39(1)/2001, Consumer Protection Laws, the Health and Safety of Work Law 89(1)/96 and the Environmental Protection Legislation etc.
Extent of Liability
According to Section 194(1) of the Companies Law, the Directors’ liability in a company may be unlimited if this is provided expressly for in the memorandum. This rarely occurs. In order for this to be the case, under section 194(2), the Directors and any managers of the company and the member who proposes a person for election or appointment to the office of Director or Manager, must add to that proposal a statement that the liability of the person holding that office will be unlimited, and before the person accepts the office or acts therein, notice in writing that his liability will be unlimited must be given to him by the following or one of the following persons: the promoters of the company, the Directors of the company, any managers of the company and the secretary of the company.
Exemption from Liability
Many raise the question if there is any way for the Company Director to become exempt of liability. Under section 197 of Cap.113, it is not possible to grant a general exemption in advance to Directors in respect of liability to the company. According to the wording of the articles: ‘‘any provision contained in the articles of association, memorandum or in any contract with a company exempting a director from, or indemnifying him against any liability, which he may otherwise have by virtue of any rule of law in respect of negligence, breach of duty or breach of trust been guilty in relation to the company, shall be void.’’
However, this does not mean that the Director is deprived of any possibility of exemption or right to be indemnified in respect of anything carried out by him. The company may indemnify Directors against the costs incurred in legal proceedings, whether civil or criminal, in which judgment is given in the Director’s favour or the Director is acquitted . In addition, the court may grant relief under Section 383 of the Companies Law, Cap. 113. Section 383 gives power to the court to relieve Directors, wholly or partly, from liability if in any proceedings for negligence, default, breach of duty or breach of trust if it appears to the court that the Director has acted honestly and reasonably, and that having regards to all the circumstances of the case, including those connected with the Director’s appointment, he ought fairly to be excused for the negligence, default, breach of duty or breach of trust. Pursuant to section 383(2), the Director is able to apply to the court for relief if he apprehends that an action for breach of duty or breach of trust, negligence or default will be taken against him, and the court may grant him relief as if the case preceded it. It is notable that it is not enough for the Director to have acted honestly and reasonably, however he must additionally prove that he ought to be justly excused.