By George Liasis, Partner, Head of Indirect Tax, EY Cyprus & Ioanna Drousioti, Senior, Indirect Tax, EY Cyprus
The main reason why business owners choose to run their business via a Limited Liability Company rather than sole trading is to benefit from the limited liability protection that it brings. Limited Liability provides the security that in case the business fails or gets bankrupt the personal assets of the Company’s officers cannot be seized in an effort to repay obligations and/or outstanding liabilities of Company.
This provides the illusion that the Officers cannot in any way be held liable for their actions and Company’s tax misconduct. This is of course not the case, especially for VAT/GST related matters. In the majority of countries around the globe, an officer can be held personally liable for a Company’s VAT misdoing however the rules of each country of course can vary.
Understanding Officers’ liability under Cyprus VAT law
As a starting point, when a VAT offence is committed by a Company in Cyprus (such as mis-compliance with VAT obligations, false documentation, wrong application of VAT provisions, VAT frauds, evasion etc) the Company can face apart from civil liability (i.e. monetary fines) criminal liability as well (i.e. criminal penalties, confiscation orders, business prevention orders).
However, the Cyprus VAT legislation makes it clear that when a criminal offense under VAT Law is committed by a legal entity, the liability for the offence can be borne in addition to the legal entity itself, by the directors or the executive officials of the legal entity. This means that when a VAT crime is committed by a Company, the Cyprus Tax Department can initiate criminal proceedings against the Company’s officers too. This will often be the case where the Company fails to rectify its actions or respond to any of the authorities’ warnings for an extended period of time.
In such circumstances, the officers in question can face criminal prosecution, fines and/or imprisonment for the Company’s VAT misdoing. Civil Liability though falls only to the Company- person.
An “executive officer“ for the purposes of the VAT legislation means any director (including nominee directors and non-executive directors) or other similar official of the legal entity carrying out a managerial role. Secretaries are also captured under the officer’s definition.
A ‘Strict Liability Offence’
Case law of the Cyprus Supreme Court of Justice also clarified that the Criminal liability of the Officers for VAT misconduct is a ‘strict liability offence’ – meaning not a ‘criminal’ mens rea/ mindset is needed for an officer to be convicted. Thus, an officer can be held liable even if he or is she is unaware of such offence.
‘’There is no such a thing such as ‘typical directors’’ the Court stated in many instances. If you are an officer of the Company, you are deemed to know the Company’s affairs including tax related matters and take all necessary steps for the Company to be VAT compliant.
It is therefore difficult for officers to deny liability merely on the reason that they were not really involved the tax/ VAT affairs of the Company. Once a person is appointed as an officer of a Company, he or she has all relevant responsibilities and obligations defined in the relevant Cyprus corporate and tax laws at the time (i.e., exercise reasonable care, skill and diligence etc)
It is also to be noted that that insurance policies do not (in most instances) cover tax liability offences.
Precaution is the key!
Considering the above, officers must take some precautionary measures/actions to avoid imposition of criminal liability for VAT offences including the following:
- Timely VAT Registration: Officers must ensure that their Companies are registered for VAT purposes with the Cyprus Tax Department, following the applicable thresholds and deadlines.
- Accurate VAT Reporting: Officers should ensure that the company’s VAT returns are prepared accurately and submitted within the prescribed timeframes.
- VAT Payments: Officers must ensure that VAT liabilities are paid to the tax authorities within the specified deadlines.
- Record-Keeping: Officers should maintain comprehensive and accurate records of all VAT transactions, invoices, receipts, and related documentation. These records must be retained for the required period of 6 years in Cyprus to facilitate VAT audits and inquiries.
- VAT Opinions and Rulings: Officers must ensure that they have an informed and well supported and documented Opinion on VAT matters (especially in grey- controversial VAT areas) and/or obtain relevant VAT rulings from the Cyprus Tax Department
- Data quality: Officers should also pay attention to the quality of data maintenance and verification, the implementation of ERP configuration processes and ways to enhance business automations for reducing risks and increasing visibility.
Conclusion
Officers in Cyprus bear significant responsibilities when it comes to adhering Company’s VAT rules. Understanding their compliance obligations and remain well-informed about any updates in VAT regulations is crucial for minimising risks and maintaining effective governance. This includes ensuring that their teams and other Company members carrying out day-to-day VAT tasks are well informed and remain up-to date with new legislation updates. Afterall, officers are human beings and especially in large organisations where delegation comes to play it is impossible to keep an eye on every single business task. So proper management and delegation is a key.
Seeking professional guidance from reputable and trusted advisors can also provide valuable assistance in navigating the complexities of VAT compliance and mitigating director’s VAT liability risks. To navigate the intricate landscape of VAT compliance and mitigate the risks associated with VAT liabilities engaging the services of reputable advisors who offer professional guidance can be proven invaluable.
It is also important for officers to arrange the adoption or upgrade of the Company’s technology systems to take advantage of technological development opportunities i.e. facilitation of VAT compliance processes, automations, gathering and transmission of information, validation of invoices etc.
Lastly, it is advisable for officers to consider adopting some internal VAT audits and compliance checks occasionally, to ensure that their business runs in accordance with VAT updates and recent practices. Identifying potential VAT errors in advance and arrange for their rectification timely is crucial in avoiding future possible conflicts and challenges from the tax authorities.