Subsidiary liability: key concepts and applications
Patrick Gordinne Perez2024-12-27T07:50:57+00:00Subsidiary liability is a legal concept that implies that one person can be liable for the debts of another person in case the latter is unable to meet his or her obligations.
This mechanism is particularly relevant in the tax and business sphere.
Its application is regulated in Spanish law and differs from joint and several liability.
If you are a self-employed entrepreneur, you play in the Champions League of the risk of those who take risks.
We must not only think about our own liability, but we must also take care that we do not incur another liability of a third party.
This article will address the key aspects of vicarious liability, its scope of application and practical examples.
Concept of Subsidiary Liability
Subsidiary liability is a key concept in the legal field that establishes the obligation of an individual or entity to pay a debt in the event that the principal debtor is unable to meet its obligations .
This principle is regulated in several pieces of legislation dealing with insolvency and tax compliance.
Legal definition of subsidiary liability
The legal definition of subsidiary liability is a guarantee mechanism for creditors.
In this context, the payment obligation will fall on a third party, called a subsidiary liable party, when the main debtor is in a situation of total or partial insolvency.
This figure is not only liable for non-payment, but must also comply with the requirements established by law for this liability to become effective.
The law establishes that the subsidiary liability is not automatically activated.
It must be shown that the principal debtor has defaulted on his obligations and that his insolvency has been declared.
In this way, the creditor can claim the fulfilment of the debt from the subsidiary liable party, who must have omitted his duties in the proper management of the financial obligations.
Legal Context of Subsidiary Liability in Spain
In Spain, subsidiary liability is mainly regulated by the General Tax Law, specifically in Article 43.
This law defines who can be affected by this liability and under what circumstances it can be enforced.
The law applies to various figures, including directors of companies and legal persons who, through their actions or inaction, have contributed to the creation of a situation of tax non-compliance.
Within this framework, it also considers the significance of the conduct of those responsible and how this may influence non-compliance with tax obligations.
The scope of subsidiary liability is broad, ranging from company directors to customs representatives.
Each of these roles faces specific criteria that determine their potential liability for non-payment of debts, which is essential for safeguarding the fiscal interests of the State.
Differences with Joint and Several Liability
The differences between subsidiary and joint and several liability are significant.
In joint and several liability, all debtors can be claimed for the total debt without being required to prove the insolvency of the main debtor.
This means that a creditor has the power to demand payment from any joint and several debtor.
The creditor does not need to take prior action to establish the lack of solvency of the principal debtor.
On the other hand, subsidiary liability requires the creditor to first prove the principal debtor’s inability to pay.
This feature makes subsidiary liability act as a protected remedy, aimed at ensuring compliance with tax obligations in a more controlled and measured way.
The liabilities and consequences of each modality are different, and this affects how debt claims are handled in the legal sphere.
Scope of application of subsidiary liability
The capitalist system is based on manufacturing, selling and, above all, getting paid, which is why the fact of getting paid is regulated by law in order to guarantee payment.
Subsidiary liability can occur in many areas of life.
- Who has not heard the case of elderly people who have lost their flat because they have guaranteed their son’s loan and then failed to pay.
- Every entrepreneur who has a company knows perfectly well that if you ask the bank for a loan for the company, they will put the administrators as guarantor as a guarantee for the loan.
- If you have a real estate company and sell a newly built property, you will have to provide the builder with the tax and social security certificates so that he can be sure that you do not have any debts that would make him vicariously liable for your debts.
- In the case that a letter has arrived from the social security or tax authorities because the worker has a debt and his salary has been seized.
In short, the scope of subsidiary liability is extensive and covers several areas of law.
It manifests itself especially in fiscal and business contexts, where different situations and actors can be identified that involve it.
Relevant Legal Areas
Subsidiary liability arises in a number of areas of law that regulate payment obligations. These include:
Tax law:
In this area, subsidiary liability is key to ensuring compliance with tax obligations.
The tax authorities can claim payment of tax debts from those who are vicariously liable when the main debtor is unable to meet its obligations.
Commercial law:
Company directors can be held vicariously liable if they fail to comply with tax regulations in the course of their business.
This affects both large companies and small and medium-sized enterprises (SMEs).
Insolvency law:
During liquidation proceedings, members of the insolvency administration are vicariously liable if they fail to properly manage tax debts, which can lead to significant financial problems.
Civil law:
In the civil sphere, subsidiary liability may arise in situations of acquisition of assets subject to tax debts, where the new owners may be liable for the payment of these debts.
Importance in the tax sphere
The impact of subsidiary liability in the tax sphere is significant, as it enables the authorities to ensure the collection of taxes due. Some important points are:
Assurance of Collection:
This mechanism ensures that, even if a principal debtor is insolvent, tax debts are met by reclaiming those in positions of responsibility.
Prevention of Tax Fraud:
By establishing the possibility for vicariously liable persons to face debts, managers and stakeholders are deterred from acting negligently or fraudulently.
Encouraging Regulatory Compliance:
The existence of this liability creates an environment in which good administrative and tax practices are promoted, as managers know that they can be called to account for unfulfilled obligations.
Protection of the Fiscal System:
By ensuring that effective grievance mechanisms are in place, the integrity of the fiscal system is protected, which is vital for the functioning of the state and the financing of public services.
Joint and Several and Subsidiary Liability
The concept of joint and several and subsidiary liability plays a crucial role in the legal and fiscal field.
These forms of liability, although related, have different characteristics and applications that are important to understand.
Key Differences between Joint and Several Liability and Subsidiary Liability
Joint and several liability and subsidiary liability have key differences that influence how a creditor can claim payment of a debt:
1. Claiming the debt:
Joint and several liability: The creditor may claim the entire debt from any of the joint debtors, without the need to prove the insolvency of any of them.
Subsidiary liability: The creditor can only claim from the subsidiary liable party once the insolvency or default of the principal debtor has been proven.
2. Insolvency:
- Joint and several liability: It is not necessary to prove the financial situation of the main debtor, as all joint and several debtors are equally liable.
- Subsidiary liability: It is essential to prove that the main debtor lacks the capacity to pay before turning to the subsidiary debtor.
These differences have a direct impact on the rights of the creditor and the obligations of the debtors involved.
Practical Examples of Joint and Several Liability and Subsidiary Liability
Cases of Use
The scenarios in which joint and several and subsidiary liability are applied are diverse and reflect the importance of each modality in legal and business practice.
- Joint and several liability:
- A group of partners in a commercial company may be considered jointly and severally liable for the company’s tax obligations. In this case, the tax authorities can demand payment of the tax debt from any of them, without the need to prove prior insolvency.
- Subsidiary liability:
- In the case of an administrator who leaves his or her functions without guaranteeing the fulfilment of tax obligations, creditors must first prove that the company is insolvent before claiming payment from this administrator.
Joint and several liability
Understanding who can be considered jointly and severally or vicariously liable is essential for proper debt management. The characteristics of each type of responsible party define their exposure to financial risk.
- Jointly and severally liable:
- Include all partners in a partnership, who assume the entire debt jointly. This situation may arise in the creation of companies where liability for debts is not limited.
- Subsidiary Liability:
- These are commonly company administrators or persons who have a management role. They are liable once it has been proven that the principal debtor is unable to satisfy the payment obligation.
- They may also include those who have acquired assets that were subject to tax burdens, in specific situations where their intervention is required to settle unfulfilled debts.
Subsidiary Liability in the Corporate Sphere
Subsidiary liability in the business environment is of considerable importance, as it ensures compliance with tax obligations and enables the authorities to collect debts that would otherwise remain unpaid.
This legal framework has implications for small and medium-sized enterprises as well as for large corporations.
Implications for SMEs and Large Corporations
Small and medium-sized enterprises (SMEs) and large corporations face different challenges in relation to subsidiary liability.
For SMEs, the risks can be more significant due to their lower financial capacity to take on unexpected debts.
On the other hand, large companies, although they have more resources at their disposal, must also ensure that their managers comply with tax regulations to avoid penalties and subsidiary liabilities.
For SMEs:
- Resource constraints to manage debts.
- Potential for bankruptcy in the face of tax defaults.
- Dependence on good governance to prevent liabilities.
For Large Enterprises:
- Increased complexity in the administration chain, which can result in oversights.
- Exposure to more exhaustive tax audits.
- Management responsibility for maintaining legality and tax compliance.
Directors’ liability
Directors of companies, both SMEs and large corporations, play a key role in preventing vicarious liability by ensuring proper management and compliance with legal and tax obligations.
Their management not only affects day-to-day operations, but can also determine exposure to tax risks.
- Obligations of the Administrators
- :Ensure compliance with the company’s tax obligations.
- Perform internal audits to detect irregularities.
- Keep clear and accurateaccounting records.
- :
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- non-compliance
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- Consequences of non-compliance
- :Possibility of being held vicariously liable for tax debts.
- Legal implications that may affect your professional reputation.
- Risk of legal action by the tax authorities.
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Leer másProcedure to Declare Subsidiary Liability
The procedure for declaring subsidiary liability consists of several established legal steps, in which the Tax Administration plays a central role, ensuring compliance with the applicable regulations and guaranteeing the rights of the parties involved.
Legal Steps to Follow
The process of declaring subsidiary liability is regulated and consists of several steps that must be meticulously followed to ensure its validity.
These steps include:
- Notification of the Debt: The first step is for the creditor to notify the principal debtor of the existing debt. This notification is essential for the seriousness of the non-compliance with the tax obligations to be recognised.
- Declaration of Insolvency: Subsequently, the insolvency of the principal debtor needs to be established. This may require a formal declaration or court proceedings to show that the debtor is unable to meet his obligations.
- Omission of Actions: It must be proven that the person claimed to be vicariously liable has omitted to carry out the actions that are legally incumbent on him/her. This omission must be demonstrated through documentary or testimonial evidence.
- Request for Declaration: Once the above steps have been completed, a formal request for a declaration of subsidiary liability must be submitted to the competent authority. This application must include all relevant documentation supporting the legal steps taken.
The role of the Tax Administration in subsidiary liability
The tax administration plays a crucial role in the subsidiary liability procedure. Its intervention is manifested in several stages of the process.
- Evaluation of the Application: Once the application has been submitted, the Tax Administration evaluates the information and documentation submitted to determine whether there is sufficient grounds to declare liability.
- Opening of a File: If it is considered that there are sufficient elements, an administrative file will be opened. This file is key to carry out the detailed analysis of the financial situation of the main debtor and the subsidiary liable party.
- Inspection: The Administration may carry out physical or documentary inspections to verify the veracity of the statements and facts alleged in the application for a declaration of subsidiary liability.
- Notification of Resolution: Finally, the administration will be responsible for issuing a resolution declaring or denying subsidiary liability. This decision must be notified to all parties involved.
Subsidiary liability: Lifting of the veil
The cases of derivation of subsidiary liability by lifting the veil are intended to prevent tax fraud arising from the emptying of the principal debtor’s resources and assets.
Subsidiary liability
In the case of the derivation of subsidiary liability for non-payment of tax debts , so-called “lifting of the veil” cases are becoming more and more common:
- These are intended to prevent the creation and use of companies to conceal and empty their assets in order to defraud the tax authorities.
- In order for these cases to be applicable, the Inland Revenue must prove (remember, the burden of proof) that such companies have been created or used to evade, in an abusive or fraudulent manner, the universal financial responsibility towards the Inland Revenue.
SCENARIO 1: SAFE HAVEN SOCIETY
Safe-haven company
The first scenario occurs when so-called safe-haven companies are created.
These are companies controlled by a person or family group to which assets are transferred.
At the same time, the transferors default on their tax debts, declaring themselves insolvent.
If the tax authorities can prove the fraudulent nature of this shelter company, they will be able to hold it vicariously liable.
Example 1 of subsidiary liability
A family group owns company A, which carries on an economic activity.
This company stops paying several taxes and transfers part of its assets to company B, which has the same partners.
After a short time, company A becomes insolvent .
In this case, the tax authorities could pass on the liability to company B as a shelter company.
SCENARIO 2: SHELL COMPANY
Front company
The second case of piercing of the veil occurs when a shell company, i.e. a company controlled by a person or family group, is created or used to deliberately create an insolvency situation in the company as a means to avoid paying taxes.
In this case, liability can be shifted to the persons or entities controlling the shell company.
Example 2 of subsidiary liability
A family group owns company C, which carries on an economic activity.
This company stops paying its taxes and then transfers assets and money to its partners, leaving it without resources to meet its tax debts.
The tax authorities can then pass on the liability to the partners who have acquired these assets.
COMPANY SUCCESSION
Failed debtor
As indicated above, these two cases involve a derivation of subsidiary liability.
In this case, proceedings against the subsidiary liable parties can only be initiated once the tax authorities have declared the main debtor and any joint and several liable parties in default.
Joint and several liability
However, in certain cases the Treasury may consider the liability to be joint and several, which allows it to act against those liable without the need for the main debtor to be declared bankrupt.
Specifically, this may occur when the assets transferred are a set of elements that allow the acquiring company to continue the business that the transferor was carrying out (and not isolated elements).
In that case, we would be dealing with a “business succession“.
Derivation of subsidiary liability
In the derivation of subsidiary liability, once the main debtor is declared bankrupt, the proceedings against him do not interrupt the statute of limitations.
Subsidiary liability
Tax debt can be claimed not only from the main debtor, but also from those who are vicariously liable.
However, the Supreme Court has clarified some issues to be taken into account in proceedings for the derivation of liability.
Declaration of insolvency
Firstly, the Court has clarified that the declaration of bankruptcy made by the AEAT enables other administrations that are creditors of the taxpayer to also derive liability without making another declaration of bankruptcy.
Prescription
Likewise, the declaration of bankruptcy is considered to be the moment at which the limitation period for the claim for payment towards those who are subsidiarily liable begins.
Interruption of the statute of limitations
Finally, it clarifies that, once the main debtor has been declared bankrupt, any collection action against him is unnecessary and therefore does not serve to interrupt the limitation period for claiming against those subsidiarily liable.
This is so unless there has been a revision of the declaration of bankruptcy and a rehabilitation of the uncollectible claims due to supervening solvency.
Thus, an enforcement order served on the main debtor after his declaration of insolvency will not be able to interrupt the limitation period for payment claims against subsidiary debtors.
If you are faced with an assumption of derivation of subsidiary liability due to veil piercing, check whether this is the derivation assumption that applies to you…