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The real goal of verdicts under Article 205 of the Criminal Code: are there any purposes of this article?

06 April, 2018 Newsletters

In recent years, Art. 205 of the Criminal Code has become widespread not only within criminal proceedings concerning crimes in the sphere of business activities, but also within administrative disputes between taxpayers and tax authorities.

In this review, we propose to focus on the practical application of the provisions of Art. 205 of the Criminal Code in courts, as well as on the analysis of efficiency and reasonability of such provisions.

1.

According to the data of Unified State Register of Court Decisions, 368 court decisions under Art. 205 of the Criminal Code “Sham business” were delivered, only 3 of which are acquittal verdicts, 40 guilty verdicts and 325 verdicts on approval of plea agreements (i.e. without the actual examination of evidences by the court). The mentioned court decisions are available in the Useful Documents; their short description and details are given in the table.

Let’s try to understand whether such prosecution meets the goals and objectives of Art. 205 of the Criminal Code in fact and whether it is really effective.

2.

We remind that Art. 205 of the Criminal Code covers only:

“[…] the establishment or acquisition of businesses entities (legal entities) to cover illegal activities or engage in prohibited types of business”.

Thus, literally Art. 205 of the Criminal Code covers only the moment of creation of a legal entity with intentions to conduct a “sham business”.

According to this article, penalty is provided in the form of a fine of five hundred tax-free minimum incomes up to five thousand tax-free minimum incomes.

As it is seen from the texts of verdicts according to the data of the Unified State Register of Court Decisions, actual amount of fines applied upon verdicts under Art. 205 of the Criminal Code in 2016-2018 is between UAH 2500 and UAH 85 000, while the standard fine (applied in 220 verdicts) is only UAH 8 500.

It is obvious that the task of preventing further crimes is not fulfilled by the mentioned fines, because a fine of UAH 8,500 is not an effective prevention of such activity in the future.

3.

At the same time, based on the fines applied, it seems that the investigation of criminal proceedings under Art. 205 of the Criminal Code does not fulfill the task to ensure the filling of the budget.

As to the efficiency of criminal proceedings under Art. 205 of the Criminal Code, we can say that the total amount of fines applied by verdicts in general for 2016-2018 was UAH 6 446 950. For comparison, according to Art. 212 of the Criminal Code, in 2017 only the fines was UAH 21 559 423.71, that is almost 4 times more.

Thus, the efficiency of Art. 205 of the Criminal Code is extremely low in terms of ensuring the filling of the budget and, most likely, does not even ensure compensation for the costs spent on related activities.

4.

If Art. 205 of the Criminal Code does not fulfill neither preventive function, nor compensatory function at present, the question arises as to the reasons for such widespread application of this article in practice.

Even though the offence under Art. 205 of the Criminal Code is limited by the moment when a legal entity is established, an assessment of subsequent activity of such a fictitious enterprise is given in the most verdicts. Such an assessment is given for a certain purpose.

Thus, based on the data of the Unified State Register of Court Decisions, 92 verdicts under Art. 205 of the Criminal Code further appeared in the text of court decisions in tax disputes. If we consider the total number of guilty verdicts and plea agreements (368 decisions), the percentage of verdicts that became further evidence of tax authorities in disputes with other taxpayers is 25%.

However, if we consider the verdicts providing the real assessment of further operations of the “sham enterprise”, sometimes with the list of contractors and the list of documents1, there are 67 % of verdicts that appeared as evidence of tax authorities in disputes with other taxpayers.

At the same time, there are even more real cases of using Art. 205 of the Criminal Code in tax disputes – a part of criminal proceedings under Art. 205 of the Criminal Code as evidence of tax authorities appears in administrative disputes before the verdict (at the stage of interrogation protocols).

Therefore, Art. 205 of the Criminal Code is actually used rather to create an artificial “evidence base” against other taxpayers.

5.

It seems that Art. 205 of the Criminal Code is currently used not for “purpose”, and the amount of penalty imposed on such an article is not an actual “protector” from further “sham business”. The actual use of verdicts under Art. 205 of the Criminal Code is, more likely, for the artificial creation of evidence in administrative disputes with tax authorities regarding other taxpayers.

At the same time, even the legislative purpose behind Art. 205 of the Criminal Code is rather declarative. The qualification of a “sham business” under Art. 205 of the Criminal Code itself in practice also raises many questions, since on the one hand the intentions of the “sham enterprise” are clearly evidenced by the further activity of the “sham enterprise”, but not by the reasoning of the person at the time of registration, on other hand, the further activity is to be assessed by separate articles.

In this regard, the question arises, whether there is real reasonability of Art. 205 of the Criminal Code for the offence formally written in this article without real consequences and adequate efficiency for the budget? Maybe, it worth to consider the abolition of “sham business” under Art. 205 of the Criminal Code as a criminal offence in all?

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.

Footnotes:

1Verdicts with an assessment of further operations of a “fictitious enterprise”, in particular, with a list of counteragents and a list of documents based on the results of the analysis of the verdicts in the Unified State Registry of court decisions are 137.

Kind regards,

© WTS Consulting LLC, 2018

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