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The Grand Chamber of the Supreme Court “broke” the unfair practice of evaluating a sentence under Article 205 of the Criminal Code of Ukraine regarding the director of the taxpayer’s contractor

31 August, 2022 Newsletters

On July 7, 2022, in case No. 160/3364/19, the Grand Chamber of the Supreme Court of Ukraine departed from the conclusion of the Supreme Court of Ukraine that the status of a fictitious, illegal company is incompatible with legal business activity:

“131. In view of the fact that the Supreme Court of Ukraine mistakenly extended the provision of Article 205 of the Criminal Code of Ukraine, which has a different subject of regulation, to tax legal relations, the Grand Chamber of the Supreme Court recognizes as unfounded the conclusion of the Supreme Court of Ukraine that the status of a fictitious, illegal company is incompatible with legal business activity, in connection with which economic transactions of such companies cannot be legalized even with formal confirmation by accounting documents”.

When considering this case, the Grand Chamber noted that the court of appeal properly assessed the evidence and circumstances of the case, refuting the tax authorities’ position about the violation of the plaintiff. Primary documents, which are the basis for tax accounting according to para. 44.1 of Article 44 of the Tax Code, were examined. Such documents contain information that fully reflect the subject matter of disputed business transactions and confirm their actual implementation.

We would like to remind that the use by the tax authorities of verdicts, resolutions on discharge from criminal liability, and interrogation protocols, in which directors deny involvement in the company’s activity, as “indisputable proof” of the unreality of transactions in disputes with taxpayers was a common practice. Experts of KM Partners have repeatedly noted the problematic and “painful” nature of this issue in reviews and analytics.

Currently, the Grand Chamber has actually “refused” to recognize verdicts, resolutions on discharge from criminal liability and interrogation protocols as prejudicial for the purposes of considering the case regarding the “reality” of transactions. Such documents should be checked along with other documents in the case.

We hope that by such a decision, the Grand Chamber has put an end to the painful issue for conscientious taxpayers of establishing the “reality” of business transactions, provided there is a verdict, resolutions on discharge from criminal liability in the case, and that the change in approach will be evaluated as soon as possible during the consideration of tax disputes by the courts.

The full version of the article is available in Ukrainian by the link.

Kind regards,

© WTS Consulting LLC, 2022

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