The Supreme Court’s most significant rulings in tax disputes throughout 2023

On 8 December 2023, the Law of Ukraine No. 3453-IX of 9 November 2023 came into force, which, in effect, restored the state tax authorities’ ability to carry out tax audits, which had initially been restricted due to the COVID-19 pandemic and subsequently due to the Russian Federation’s military invasion. For the time being, entrepreneurs in Groups 1 and 2 of the simplified taxation system have retained their immunity from tax audits.

Given the resumption of tax audits in 2024, the resolution of tax disputes arising from the results of audits carried out by the tax authorities will become a pressing issue. To this end, it will be essential to be familiar with the Supreme Court’s current legal positions on tax disputes.

1. Supreme Court ruling of 23 February 2023 in case No. 640/17091/21 – Refusal to allow an audit and confirmation of the validity of the administrative seizure of property.

In its ruling of 23 February 2023 in Case No. 640/17091/21, the Supreme Court, sitting as the Judicial Chamber for Cases Concerning Taxes, Duties and Other Compulsory Payments of the Administrative Court of Cassation, concluded that Article 283 of the Code of Administrative Procedure of Ukraine has come to resemble an ‘ineffective’ procedural mechanism for implementing the institution of administrative seizure of property, which is not actually applied in the sphere for the regulation of which it was introduced. This case concerned the question of confirming the validity of an administrative seizure of a taxpayer’s property in the event of a refusal to allow tax officials to carry out an audit. It should be recalled that, until now, there had been established case law under which the court refused to confirm the validity of an administrative seizure under Article 283 of the Code of Administrative Procedure of Ukraine, solely on the basis of the taxpayer’s application to the court seeking a declaration that the order to conduct an audit was unlawful and/or its annulment. The Supreme Court justified the need to depart from existing judicial practice on the grounds that it creates the conditions for the abuse of the rights granted to taxpayers through the delaying of audits by refusing to allow authorised representatives of the tax authority to carry them out.

In issuing its ruling upholding the appeal, the Supreme Court noted that, when considering applications to confirm the validity of the administrative seizure of a taxpayer’s property, the administrative court assesses the validity of the tax authority’s decision regarding the administrative seizure of the taxpayer’s property by verifying the existence of grounds for adopting the relevant decision and the correctness of the legal classification of the taxpayer’s actions which formed the basis for adopting such a decision. A taxpayer’s challenge to an order to conduct an audit constitutes a challenge to the circumstances that led the tax authority to make the relevant application but does not constitute a dispute over the law within the meaning of paragraph 2 of Part 4 of Article 283 of the Code of Administrative Procedure of Ukraine and does not preclude the consideration of an application to confirm the validity of the administrative seizure of the taxpayer’s property. The validity of the taxpayer’s grounds for refusing to grant access to tax authority officials to carry out a tax audit forms part of the subject matter of proof in cases provided for in paragraph 2 of Part 1 of Article 283 of the Code of Administrative Procedure of Ukraine.

In other words, from now on, the taxpayer will have to prove the groundlessness of the administrative seizure of property and, consequently, the lawfulness of the refusal to allow tax officials to carry out the audit, within an extremely short timeframe. This is because, in accordance with the provisions of Article 283 of the Code of Administrative Procedure of Ukraine, the court must rule on the merits of the claims made no later than 96 hours from the time the circumstances giving rise to the applicant’s appeal to the court are established.

The legal position of the Supreme Court set out above, together with the risk of receiving a decision from the tax authorities that the VAT payer meets the risk criteria, in the event of refusal to allow an audit, effectively remove from the taxpayer’s arsenal of rights protection measures such a remedy as refusal to allow an audit to take place.

2. Supreme Court ruling of 3 August 2023 in Case No. 520/22505/21 – within the scope of a desk audit, it is not possible to establish circumstances indicating the taxpayer’s guilt or the intentional nature of their actions.

A fairly common breach of tax legislation by taxpayers is the failure to meet the deadlines for payment of an agreed financial obligation. Since May 2020, under the Tax Code, when holding a taxpayer liable for such a breach, the tax authority has been required to take into account the intentional nature of the act; and where circumstances indicating intent were established, the amount of the penalties was increased by a factor of 2.5 to 5. At the same time, the timeliness of payment of agreed tax liabilities is largely the subject of a desk audit. When conducting such audits, the tax authorities generally justify the finding of intent to pay taxes late on the grounds that the taxpayer is fully aware of the deadline for payment of a particular tax.

In resolving a tax dispute on a similar issue, the Supreme Court, in its ruling of 3 August 2023 in case No. 520/22505/21, concluded that ‘within the scope of a desk audit, it is not possible to establish circumstances indicating the taxpayer’s culpability and intent, since a desk audit is conducted exclusively on the basis of the data set out in tax returns, and data from the relevant electronic systems, which objectively cannot confirm or refute the taxpayer’s reasonableness, good faith and due diligence, which are necessary to establish their guilt. Thus, the failure to prove the claimant’s culpable conduct constitutes sufficient grounds for recognising the unlawfulness of imposing a penalty on the claimant amounting to 50 per cent of the sum of the unpaid (or late-paid) financial liability, and therefore the contested tax assessment notice is unlawful and must be set aside by the court’.

3. Supreme Court ruling of 4 October 2023 in case No. 160/19575/22 – proving the impossibility of fulfilling tax obligations.

Due to the full-scale aggression by the Russian Federation, and with the aim of supporting domestic businesses, the legislature introduced a mechanism in September 2022 designed to exempt taxpayers who were unable to fulfil the tax obligations imposed on them from 24 February 2022, provided that they fulfilled those obligations within 60 calendar days from the first day of the month following the month in which such capacity was restored. The decision confirming a taxpayer’s inability to fulfil their tax obligations, or confirming their ability to do so, is taken by the State Tax Service on the basis of the application submitted by the taxpayer and supporting documents. A taxpayer may appeal against such a decision if they disagree with it.

On 4 October 2023, the Supreme Court issued a ruling in Case No. 160/19575/22, which contains a legal opinion regarding the confirmation of a taxpayer’s inability to fulfil their tax obligations in a timely manner. Unfortunately, this ruling was not in the taxpayer’s favour, and the Supreme Court noted that, for a taxpayer to be exempted from fulfilling their tax obligations, the circumstances giving rise to such impossibility must be genuine and objective, rather than merely formal. The taxpayer must provide a comprehensive list of documents confirming the existence of circumstances that make it impossible to carry out business activities and fulfil tax obligations. Evidence confirming the taxpayer’s inability to fulfil their tax obligations includes, in particular, evidence confirming that, at the claimant’s place of registration—where the relevant damage occurred— any business activities were carried out and documents, machinery and/or equipment were stored; reports on the loss (destruction or damage) of computer and other equipment must contain details of exactly which computer equipment and financial and business documentation were destroyed, and must demonstrate that the destroyed computer equipment and documentation were used in business activities and contained up-to-date information necessary for the submission of reports for the current periods of business activity. Furthermore, the absence of funds in the taxpayer’s bank accounts indicates an inability to fulfil tax obligations.

4. Supreme Court Ruling of 4 December 2023 in Case No. 480/4636/19 – the systematic activities of a natural person carried out with the aim of making a profit, for tax purposes, must be classified as entrepreneurial.

The Supreme Court’s ruling of 4 December 2023 in Case No. 480/4636/19 resolved a dispute between an individual and the tax authority regarding the declaration of unlawfulness and the annulment of a tax assessment notice — a decision imposing a financial liability on the claimant in respect of personal income tax.

The dispute arose because, over a certain period of time, the claimant had constructed 23 properties with a total area of approximately 25,000 square metres and had sold them. In assessing this activity, the panel of judges noted that the construction of such a large number of similar properties (houses) and their subsequent sale indicates an intention to make a profit from such activities, rather than to satisfy the citizen’s own (personal) needs, and constitutes a systematic activity. A series of consistent, purposeful actions aimed at the construction and subsequent sale of identical properties for the purpose of making a profit indicates that, for tax purposes, the claimant’s activities should be classified as business activities, and, consequently, the transactions in question are subject to taxation in accordance with the relevant provisions of the Tax Code of Ukraine at a rate of 18 per cent, irrespective of the taxpayer’s specified types of economic activity.

Moreover, the court reached this conclusion even taking into account the fact that the claimant had independently paid personal income tax on the sale of immovable property as a natural person at a rate of 5 per cent of the amount (value) and 1.5 per cent military levy in accordance with Articles 167 and 172 of the Tax Code of Ukraine.

Read the article on the “Liga Zakon” website: here.