ECJ ruling strengthens the defense rights of managing directors

What this means for German directors' liability for tax purposes

Frankfurt am Main

August 3, 2026

---

New ECJ ruling brings fundamental changes to directors' liability

In a recent ruling of July 16, 2026 (Case C-158/25), the European Court of Justice (ECJ) significantly strengthened the defense rights of managing directors in liability proceedings concerning unpaid value-added tax. The decision has direct implications for German tax law and could fundamentally change the tax authorities' practice when pursuing claims against managing directors.

What happened?

In the initial proceedings, the Luxembourg tax authorities had sued a managing director personally and jointly and severally for VAT debts of his former company. The tax assessments against the company were already final. The ECJ has now ruled that Article 47 in conjunction with Article 51 of the Charter of Fundamental Rights of the European Union is applicable to such actions.

Key to the decision:

A managing director held liable must be able to incidentally challenge the legally binding tax assessment against the company as part of their legal remedy against the liability order. A national regulation that prohibits this violates the right to an effective remedy.

The current legal situation in Germany

In Germany, Section 166 of the Fiscal Code (AO) governs the so-called "third-party effect" of tax assessments. This provision states that a tax assessment that is legally binding on the taxpayer must also be accepted by anyone who would have been able to challenge the tax assessment as a representative, agent, or by virtue of their own right.

In practice, this means that a managing director who has not contested a tax assessment during his term of office cannot raise any objections to the amount or existence of the tax debt in subsequent liability proceedings.

The conflict between ECJ case law and German law

The ECJ decision is in clear tension with the German legal situation:

• ECJ position: The managing director must be able to effectively challenge all factual findings and legal assessments on which the authority bases its liability. This includes the tax base, the amount of unpaid VAT, and any violations of fundamental rights during the taxation proceedings.

• German position: According to Section 166 of the German Fiscal Code (AO), a managing director who had the opportunity to contest a tax assessment is precluded from raising objections to the primary debt in liability proceedings. The rights of defense can be restricted by Section 166 AO.

What does this mean in practice?

1. Interpretation of Section 166 of the German Fiscal Code (AO) in conformity with EU law

German tax courts will be obliged to interpret Section 166 of the German Fiscal Code (AO) in conformity with EU law. This could lead to a more differentiated application, for example:

• Limitation of application to cases in which the managing director actually had a genuine opportunity to challenge the law

• Recognition of exceptions if the liability claim only became apparent after the judgment became legally binding.

• Allowance of an incidental appeal at least for certain objections (e.g. procedural errors, violations of fundamental rights)

2. Obligation to refer a case to the ECJ

In pending proceedings, German tax courts may be obliged to refer the matter to the ECJ to clarify the compatibility of Section 166 AO with EU law.

3. Impact on insolvency proceedings

The decision is particularly relevant for insolvency proceedings. According to the Federal Fiscal Court's (BFH) case law, the uncontested entry of a tax claim in the insolvency schedule has the same effect as a legally binding tax assessment. The European Court of Justice (ECJ) could challenge this case law, as managing directors often cannot effectively raise objections in insolvency proceedings.

Recommendations for Managing Directors

Before the liability proceedings

1. Seek legal advice early: If you are facing potential liability claims, contact a specialized tax advisor or tax lawyer as soon as possible.

2. Review tax assessments: Carefully review all tax assessments issued by your company and file an objection within the deadline if you have any doubts.

3. Documentation: Carefully document your measures to fulfill your tax obligations.

In the liability proceedings

1. Comprehensive defense: Utilize all possible objections to the liability notice, including objections to the underlying tax debt.

2. Check for procedural errors: Check whether there are any procedural errors or violations of fundamental rights that you can assert.

3. Take action: Don't wait, but actively challenge the liability assessment. File an objection to the liability assessment. The deadline for filing an objection is one month. Use the templates from PepperPapers.de for your objection – specifically designed for liability assessments from the tax office.

Conclusion

The ECJ ruling of July 16, 2026, is a milestone in German liability law. It strengthens the defense rights of managing directors and could lead to a fairer structure of liability law that better takes into account the principles of the right to be heard and the right to an effective remedy.

It is expected that the tax courts and the Federal Fiscal Court will adjust their jurisprudence. Until the Federal Fiscal Court or the European Court of Justice clarifies the matter, affected managing directors should thoroughly examine and utilize their defense options. This means: challenging liability assessments, filing an objection , and thus keeping the proceedings open.

Sources:

• ECJ, judgment of July 16, 2026 - C-158/25 , AEDT and État du Grand-Duché de Luxembourg, request for a preliminary ruling from the Cour de cassation du Grand-Duché de Luxembourg (Luxembourg)

• PepperPapers sample templates: Objection to the tax office's liability notice

TaxPro Successful Judgments - Learn more!