The responsibility of directors in the tax field and in tax planning, both criminal and civil.
Every taxpayer, whether an individual or a company, has the right to plan their anticipated tax liability in a way that minimizes it as much as possible. Simultaneously, tax planning can involve a series of challenges such as: difficulty in assessing the level of criminal/civil exposure, difficulty in estimating the extent of the reporting obligation of the planning to the tax authorities, and insufficient familiarity with the law and existing rulings in the field. For more information on the criminal liability of an individual taxpayer in tax planning.
Office holders and directors, in particular, bear severe civil and criminal responsibility for the actions of the corporation. The main reason for imposing criminal liability is to create an incentive for office holders to avoid offenses (increase the level of caution) as much as possible and to establish effective supervision methods within the framework of corporate governance.
Beyond the responsibilities of office holders detailed in the Companies Law, the Income Tax Ordinance includes both direct responsibility for directors and office holders due to their active behavior and vicarious liability due to the criminal behavior of another entity in the corporation when there was active knowledge on their part. For example, the purpose of Section 117 of the Income Tax Ordinance is to prevent avoidance by a manager or clerk in a corporate entity, among other things, from fulfilling his duties as a taxpayer according to the ordinance.
The offenses establishing criminal liability are found in Sections 215-220 of the Income Tax Ordinance, essentially covering all tax offenses. Section 224A of the Income Tax Ordinance states that when a corporation that has violated these sections, every active manager will also be seen as guilty unless they proved that they were unaware of the offense and that they took all reasonable measures to prevent it.
This responsibility does not require proof of criminal intent. In fact, the law establishes a presumption that if it is proven that the accused served as an active manager in the company at the time the attributed offense was committed – this will suffice to attribute criminal responsibility to them.
The default penalty in the Income Tax Ordinance is one year of imprisonment or a fine, or both (according to the Penal Law), but since it is a case of strict liability (criminal intent is not required), according to the Penal Law, imprisonment cannot be sentenced without criminal intent or negligence.
The legal interpretation defining an “active manager” is broad and includes any organ of the company and any manager whose actions are seen as those of the corporation itself. In the case of State of Israel vs. Roni Ma’orer (CA (TA) 24/90), it was also determined that a manager who is not registered but actively involved in the day-to-day management falls under the scope of this section. Furthermore, there is a deduction mechanism for the corporation (Section 119(a)(g1) of the Ordinance), according to which a manager convicted of a tax offense can be charged for the tax not paid by the corporation.
Directors and office holders are also responsible for illegitimate tax planning. Tax planning itself is legitimate as long as there is a clear distinction between such a case and a case of attempting to evade taxes, and it seeks to enjoy a tax incentive while ensuring that the tax planning includes a commercial rationale beyond reducing taxes. Directors must be cautious about approving actions that could raise claims by the tax assessor regarding artificiality or different classification.
Tax planning is a legitimate and vital activity for the proper operation of a company. To reduce the possibility of criminal exposure, even if unintentional, having an auditor whose role is to perform an accounting audit is not always sufficient to mitigate tax exposures. It is necessary to seek the assistance of tax professionals who will specifically examine tax exposures, disclosure and reporting obligations regarding tax planning, and opinions required in reporting and align the planning with current tax decisions and professional circulars published by the Tax Authority.
Our office regularly accompanies directors, alongside the company’s accountants and lawyers, to ensure a full understanding of the tax implications of decisions and to minimize tax exposures.
