You May Be Held Personally Liable for Your Company's Tax Obligations!

The theory of piercing the corporate veil, or disregarding the legal personality of companies, is a legal doctrine that allows judicial authorities to pursue the assets of partners or shareholders of companies in certain cases[1]. On this occasion, we will focus on the possibility that the Directorate of National Taxes and Customs of Colombia (DIAN) has to pursue the assets of partners or shareholders.

This legal phenomenon causes curiosity and controversy insofar as when a company is incorporated, the new legal entity is legally constituted as a person distinct from its partners, who are only liable up to the amount of their contributions in the case of Simplified Stock Companies and Public Limited Companies, whereby personal assets are completely separated from corporate assets. If this is so, then why could the DIAN pursue the assets of partners or shareholders of companies?

Law 1607 of 2012, in its Article 142, which added Article 794-1 to the Tax Statute, provides that: “When one or more companies of any type are used with the purpose of defrauding the tax administration or as an abusive mechanism of tax evasion, the shareholder or shareholders who have carried out, participated in, or facilitated the acts of fraud or abuse of the legal personality of the company, shall be jointly and severally liable to the Directorate of National Taxes and Customs for the obligations arising from such acts and for the damages caused” (Bold and underline added).

As can be noted, this article establishes the express possibility for the DIAN to initiate actions against partners or shareholders of any type of company, when it has indications or certainty that the partners have had the intention to defraud the treasury by incorporating the company. Upon careful examination of the article, it can be noted that it refers to any type of company, thus including Public Limited Companies (S.A.), Simplified Stock Companies (S.A.S.), Limited Liability Companies (LTDA), Limited Partnerships and Limited Partnerships by Shares, and other companies provided for in the Commercial Code.

Then, the article mentions that the company must be used with the purpose of “defrauding the tax administration or as a mechanism of tax evasion,” where a distinction must be made between tax evasion and tax fraud. The former mainly refers to failing to comply with the obligations to register with the tax authority, keep accounting records, and pay taxes; therefore, it encompasses any non-compliance in filing (formal duty) and payment (material duty) of tax obligations. On the other hand, tax fraud implies that the taxpayer has the intention to deceive the administration by altering the tax return to obtain a personal benefit from the non-payment of the tax[2].

Finally, the article refers to “the shareholder or shareholders (...) shall be jointly and severally liable,” so liability no longer falls solely on the company as the sanctioned entity for tax evasion or fraud, nor on the directors, but the DIAN may also include the shareholders of the companies in its investigations so that they answer with their own assets.

Thus, although in principle incorporating a company – a legal entity – aims to protect the shareholders' assets, any partner may be held liable with their own assets for the tax obligations of their company when the DIAN manages to prove that the company has intentions to defraud the treasury.