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Decriminalization of “sham business activity”: what`s on practice?

02 December, 2019 Newsletters

On 25 September, 2019, “fictitious entrepreneurship” was decriminalized, as we already reported in our newsletter «Decriminalization of Art. 205 of the Criminal Code of Ukraine and changes to Art. 212 of the Criminal Code of Ukraine – increasing of taxes non-payment thresholds that may lead to criminal prosecution. What are the practical implications for current cases?». So, what changes have occurred two months after decriminalization? To answer this question, we turn to the official statistics of the work of pre-trial investigation bodies and the data of the Unified State Register of Court Decisions.

The fate of criminal proceedings on “fictitious entrepreneurship”

To begin with, it is interesting to refer to the general dynamics of criminal proceedings concerning “fictitious entrepreneurship” since the beginning of 2019, which is traced from the official statistics published on the website of the Prosecutor General’s Office of Ukraine:

So, the number of opened proceedings regarding “fictitious entrepreneurship” has really decreased, and such a decrease (according to similar periods of 20181) is obviously related to the decriminalization of “fictitious entrepreneurship”.

However, official statistics show that, despite the general decrease in the number of opened cases, new criminal proceedings relating to the already decriminalized “fictitious entrepreneurship ” are still appearing – according to the data at the end of September and the beginning of October, 92 more criminal proceedings have been added. We assume that the appearance of new criminal proceedings under Art. 205 of the Criminal Code of Ukraine is connected with the plume of “old” materials of the previous periods, according to which the entry in the Unified register of pre-trial investigations takes place in accordance with Part 2 of Art. 4 of the Criminal Code of Ukraine. That is, an entry is carried out under the law on criminal liability, which was in force at the time the act was committed, and then a decision on closing such criminal proceedings is pending on the basis of paragraph 4 of Part 1 of Art. 284 of the Criminal Procedure Code of Ukraine.

During the period of decriminalization of “fictitious entrepreneurship”, there is a steep increase in the number of closed criminal proceedings in comparison with the general dynamics, and this increase is not typical taking into consideration the similar periods of 20182, what is illustrated below:

At the same time, it is interesting to note that even after the decriminalization of “fictitious entrepreneurship”, criminal proceedings are still being submitted to the court. Particularly, according to the official statistics, 134 criminal proceedings were submitted to the court in October with an indictment and 53 criminal proceedings with a petition for an exemption from liability. Such statistics (including the coincidence with the number of proceedings, where a suspicion was declared3) are most likely indicate the pre-trial authorities’ desire to improve their statistics.

According to the official statistics, taking into account the number of closed criminal proceedings and submitted to court (with indictments and petitions for an exemption from liability), as of the end of October, the remainder of criminal proceedings (of those which were initiated during this year) concerning decriminalized “fictitious entrepreneurship” consists of 88 criminal proceedings. As we understand, in the next few months this figure will approach zero. However, for the sake of completeness, it should be noted that until the complete termination of the prosecution for “fictitious entrepreneurship” is still quite a long time – both in the bodies of pre-trial investigation and the court, there is a considerable number of criminal proceedings concerning “fictitious entrepreneurship” of the past years.

As for the litigation of “fictitious entrepreneurship”, for the purposes of analysis, we examined the available court decisions in the Unified State Register of Court Decisions for the period from September 25 to November 25 (i.e., a two-month data sampling), according to which, 77 court decisions were delivered, 9 of them are rulings under petitions for an exemption from criminal liability (in case of such a petition was submitted to the court) and 68 – rulings under petitions for closing the proceedings (if the court received an indictment).

As we can see, criminal proceedings for “fictitious entrepreneurship” are in the process of ceasing to exist and in the nearest future, as we hope, it will cease as a whole phenomenon.

The proportion of administrative disputes with “proof” of “fictitious entrepreneurship”

The primary task of decriminalization, as it was actually stated in the explanatory note to the relevant law, was to eradicate the erroneous approach of the administrative courts in considering the materials of criminal proceedings and sentences on “fictitious entrepreneurship”. So let’s try to analyze the data of the Unified State Register of Court Decisions on the results of tax disputes with the so-called “evidence” of “fictitious business” for the evaluation of such “evidence” by the courts.

For the purposes of the analysis, we found information that for the period from September 25 to November 25 (i.e., for two months without Article 205 of the Criminal Code of Ukraine), the Supreme Court delivered 5 judgments where the materials of criminal proceedings under Art. 205 of the Criminal Code of Ukraine were mentioned, in particular, we are talking about the Supreme Court’s rulings of November 12, 2019, in case no. 826/9815/174, of October 31, 2019, in case no. 815/2594/155, of November 22, 2019, in case no. 826/17642/146, dated September 25, 2019, in Case No. 817/992/157, dated September 25, 2019, in Case No. 520/11437/188. At the same time, no evaluation of decriminalization was provided in any of these decisions, and 4 out of 5 decisions were made in favour of the controlling authority.

That is, as we can see, the negative tendencies in the settlement of tax disputes, where there is a reference or evidence from criminal proceedings under Art. 205 of the Criminal Code of Ukraine, at least at the Supreme Court level, are still relevant, and we count on review of the approaches in the expected direction. After all, the current position, as we hope, is conditioned by the need for additional time to give a proper evaluation of such a circumstance and to form a sound legal position on the decriminalization of Art. 205 of the Criminal Code of Ukraine in tax disputes.

It should be noted that a review of some approaches is expected not only in a part of the criminal proceedings (current) materials, but also in that ones that ended with a verdict, since even with respect to a person prosecuted, the consequences of such a prosecution are negated by the part 1. Art. 5 of the Criminal Code of Ukraine:

“The Criminal Liability Act, which abolishes crime, mitigates criminal liability, or otherwise improves the status of a person, has a retroactive effect, that is, extends to persons who have committed such acts prior to the enactment of such a law, including persons, who are serving a sentence or who has already served a sentence but have a criminal conviction”.

At the same time, at the level of the courts of first instance, evaluations of the abolition of criminal liability for fictitious entrepreneurship has already been provided, although it has had a completely different result.

An example of a proper evaluation of circumstances of decriminalization of Art. 205 of the Criminal Code of Ukraine is the decision of the Zaporizhzhya District Administrative Court of October 22, 2019, in case No. 280/3570/199:

“As to the references of the defendant to criminal proceedings No. 32017110000000062 dated 22.12.2017, in which Gustav Group LLC appears, and criminal proceedings No. 42018101060000062 dated 03.03.2018, in which Akkanta Group LLC is listed on, the court states the following.

Under the part 2 Art 74 of the Code of Administrative Procedure of Ukraine, the circumstances of the case, which according to law, must be confirmed by certain means of proof, cannot be confirmed by other means of proof.

…….

Therefore, the proper proof of the implementation of taxpayer’s illegal economic activity is a court verdict, which establishes the objective part of the crime, however, evidence of the court’s verdict against the officials of Gustav Group LLC, and Akkanta Group LLC has not been added to the case file.

Also, the court pays attention to the fact that criminal proceedings referred to by the controlling authority were initiated under Article 205 of the Criminal Code of Ukraine, however, on September 25, 2019, the Law of Ukraine “On Amendments to the Criminal Code of Ukraine and the Criminal Procedure Code of Ukraine on Reduction pressure on business “, which decriminalized Article 205 of the Criminal Code of Ukraine and excluded it from the Criminal Code of Ukraine”.

A similar evaluation was made in the Decision of the Kharkiv District Administrative Court of October 10, 2019, in Case No. 520/7905/1910, the Decision of October 25, 2019, in Case No. 400/2136/1911, and the Decision of the Kyiv District Administrative Court of October 20, 2019, in Case No. 640/10734/1912.

However, in the Unified State Register of Court Decisions opposite positions may be found. For example, in the Decision of the Zaporizhzhya District Administrative Court of September 25, 2019, in Case No. 808/5098/1413, the Court noted:

“The court notes that the status of fictitious, illegal entrepreneurship of Technosfera-2000 LLC is incompatible with legal business activity, and therefore the business operations of such enterprise cannot be legalized even with an official confirmation of accounting documents.

…….

Considering the above, the court concluded that there was no legal basis in the PromPribor PE for the formation of accounting and tax reporting on primary documents written on behalf of Technosphere-2000 LLC.

The plaintiff’s reference to the decriminalization of Article 205 of the Criminal Code of Ukraine is rejected by the court because the above circumstances are irrelevant for a settlement of the disputed legal relations, given that the reason for making the disputed decisions was the conclusion of the tax authority that there were no grounds for forming the indicators of tax reporting on transactions with Technosphere-2000 LLC “because of their actual absence, but not the existence of a judgment against the contractor”.

Therefore, it is difficult to say that the goal of decriminalizing “fictitious entrepreneurship” has been achieved. However, we are convinced that in the nearest future, the higher courts will provide the only correct approach to an evaluation of the circumstances of decriminalization of Art. 205 of the Criminal Code of Ukraine in relevant tax disputes.

The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.

Notes:

1In 2018, 2,172 proceedings were opened under Art. 205 of the Criminal Code of Ukraine.

2In 2018, 273 proceedings were closed under Art. 205 of the Criminal Code of Ukraine.

3In total, in October 2019, the authorities accounted 187 criminal proceedings in which persons were notified of a suspicion.

4In USRCD (Unified State Register of Court Decisions) by the link.

5In USRCD by the link.

6In USRCD by the link.

7In USRCD by the link.

8In USRCD by the link.

9In USRCD by the link.

10In USRCD by the link.

11In USRCD by the link.

12In USRCD by the link.

13In USRCD by the link.

Kind regards,

© WTS Consulting LLC, 2019

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