Only employee’s knowledge of fraudulent activities – attribution?

Decision of the Supreme Court on the question of whose knowledge is relevant with regard to the factual circumstances of a legal transaction

On 27 September 2022, the Supreme Court ruled on a cassation appeal by the Estonian Tax and Customs Authority, which had previously issued a tax assessment notice against an Estonian company and ordered the company to pay a six-digit amount for unauthorized input tax deduction. The tax assessment notice was annulled at first instance, as was confirmed at second instance. Now the Supreme Court overturned the decision and referred the case back for a new hearing.

The background to the tax assessment notice was that goods had been purchased from third parties without VAT and sold with VAT to the company affected by the tax assessment notice via so-called “shadow sellers”. The VAT collected by the “shadow sellers” had not been paid to the state, but had been shared among the persons involved, including the purchasing manager of the company concerned. The company itself, which – according to the purchasing manager and the management of the company – had not known about these activities, had claimed input tax deduction.

The first two instances ruled that, based on the findings of the courts, the employee’s knowledge could not be attributed to the company or that the company did not know or could not have known about the activities, and therefore annulled the tax assessment notice.

The Supreme Court now ruled that the law on representation was applicable. On this basis, it is the knowledge of the representative that matters and not that of the person represented. The employee, as purchasing manager, had the authority to represent the company in the context of purchases and to conclude legal transactions in the name of the company. Accordingly, the employee’s knowledge was decisive. In this respect, it was irrelevant whether he had concealed his activities from the management or had acted for his own benefit. If the employer suffered damage as a result of such conduct, the employee was liable to the employer under private law or possibly under criminal law.

This decision should be noted insofar as, according to the Supreme Court, an employee’s knowledge about factual circumstances in connection with legal transactions of the company must be regarded as the company’s knowledge if the employee has been vested with power of representation, even if the employee conceals these factual circumstances and/or acts only for their own benefit.


Source: Supreme Court Decision of 27 September 2022, Case No. 3-17-523

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