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Recognition of a contract as "unreal" by Ukrainian tax service

This comment was prepared by Andriy Buzynnyi, lawyer of law firm “Pravova Dopomoga”. It was published in issue number 15 of “Yurydychna gazeta” newspaper dated the 9th of April 2013.

THESIS FOR THE COMMENT:

Practice of recognition of contracts as “unreal” by the Tax Service: legal grounds, possibilities of appeals.

COMMENT:

Article 1 of the Law of Ukraine “On accounting and financial statements in Ukraine” provides that a primary document is the document which includes information about a commercial transaction and confirms its completion. This is why any document (including contracts, invoices, bills) has the power of the primary documents only in case of actual completion of a commercial transaction.

Based on this, when tax authorities have doubts about actual occurrence of transaction they can recognize such transactions as “fictitious” or “unreal” and additionally impose tax obligations on all business entities that have connections with the chain of related contracts. At the same time as of today the most popular ground for the doubts is presence of so called “tax pits” or “one-day firms” in such chain which for example do not have the capacity to transport or store consignment (due to absence of warehouses, staff, vehicles, etc.).

The problem that many business entities face is that majority of them do not have ability to trace the entire chain of movement of goods and therefore they are unable to know whether a certain contract is “safe”. And only when the Tax Service informs that a contract is void based on Article 228 (a legal action that violates public order) or fictitious (Article 234) a business entity finds out about concealed facts of “origin” of goods. In any case if a transaction took place, goods are delivered, services are rendered and all these facts are duly formalized then it is quite possible to prove one’s rightness in court: as of today representatives of Themis satisfy claims related to cancellation of decisions of tax authorities more and more often.

Short analysis of judicial practice allows us to emphasize the following conclusions of judicial bodies. First of all the position of courts regarding the fact that acts or decisions of the Tax Service cannot serve as a ground for recognition of a legal action as void and result in respective legal consequences.

Resolution of the High Administrative Court of Ukraine number К/9991/50772/12 dated 14.11.12 provides that even based on features of voidance of legal actions tax authorities can only file lawsuits about recovery of funds in favor of the state and society due to their voidance. Besides, it was noted that “no law provides the right to a body of the State Tax Service to recognize legal actions and data that are provided by a taxpayer in tax returns as void personally and by means of out-of-court procedure”.

Secondly, duly documental formalization of a legal action helps to cancel decision of tax authorities that are based on “fictitiousness” or “unreality”. Obligatory documents include consignment notes, invoices, work (service) completion certificates, tax bills. At the same time one can find decisions in which absence of duly formalized consignment notes or waybills cannot serve as an independent and sufficient ground for recognition of a bargain as “fictitious”. In particular resolution of the High Administrative Court of Ukraine number К-30744/10 dated 19.07.12 states that consignment note and a waybill are not considered to be the documents of primary accounting which confirm sale of goods. Thus, presence of documents which prove transportation would be very useful since they strengthen the position of a business entity, however their absence does not indicate the opposite. The main proof is based on presence of primary accounting documents.”

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