Tax disputes are very common in Ukraine. This is because the Ukrainian tax service usually acts as a fiscal authority aiming to plug a state budget gap. Thus, it is rather difficult for a taxpayer in Ukraine to communicate with the tax authorities in the process of dispute resolution and it is better for the taxpayer to have professional legal support in the event of a dispute.
To resolve tax disputes, taxpayers commonly attempt pretrial settlement of the dispute or file a claim with a court. They also have the right to use alternative dispute resolution methods (ADR) – such as involving a business ombudsman.
It is difficult to predict how long tax disputes will take to resolve as the term can vary from 60 days to more than two years:
- pretrial settlement of the dispute – about 60 days; and
- first, second and third-instance courts – from 60 days to a year or more, depending on the caseload of the judge.
The procedural law of Ukraine sets time limits for dispute resolution but, in practice, they are usually not enforced by either the courts or the tax authorities.
Furthermore, all these time limits are conditional. The time period of dispute resolution depends on the complexity of the case, the tax authorities' actions towards the taxpayer, caseload of the court that deals with the tax dispute, external factors (e.g., quarantine restrictions), etc.
In all cases, the costs of a tax dispute usually have two components: a court fee and legal costs. Ukrainian law specifies the amount of the court fee depending on the court, the person who files a claim, the cost of the claim, level of appeal, and so on. The amount of the legal costs depends on the company that provides legal assistance.
It is possible to recover the legal costs in court in the case of winning the tax dispute, therefore, tax litigation is the most effective way to protect taxpayers' rights. However, this method is time consuming, since Ukrainian courts do not tend to follow the principle of hearing a case within a reasonable time frame.
Tax disputes usually begin when the taxpayer and the tax authorities have a different understanding of the tax legislation. Some of the tax disputes are the result of the tax authorities' decisions towards the taxpayer. So, it may be helpful to consider the causes of the tax disputes by dividing all taxes into several groups.i Personal income tax
The most common tax events that trigger personal income tax disputes are:
- failure to file or untimely filing of a tax return – taxpayers have a duty to file a tax return every year, but the time limits are different and depend on the type of a taxpayer (also these time limits have been changed during the quarantine period);
- amending a tax return – taxpayers who have discovered they have made a mistake in their tax returns after its filing can file an amended tax return to correct it;
- using the right to a tax rebate – taxpayers have a right to reduce their tax liability; and
- failure to pay the tax or incomplete tax payment – a taxpayer has to pay personal income tax within 10 days after the last day of filing a tax return.
The most common taxable events that trigger corporate income tax disputes include:
- a tax audit followed by tax audit certificate and a tax notification decision, whereby a tax authority increases the tax liabilities of the taxpayer or imposes penalties;
- the tax inspectorate's conclusion about the existence of false transactions made by a company;
- the audit of the counterparties of the taxpayer;
- a legal entity's exclusion from the register of non-profit companies – according to Ukrainian tax law, non-profit companies do not have to pay a corporate income tax;
- activities carried out by a non-resident using a representative office without registering as a taxpayer – the tax authorities consider this to be tax avoidance; and
- liquidation of a company – tax authorities conduct an audit of the company in the process of its liquidation.
The Tax Code of Ukraine does not provide for a wealth tax. However, it specifies the following types of property-related taxes: a real estate tax, a transport tax and a land fee.
The most common taxable events that trigger the respective tax disputes include:
- failure to pay or incomplete payment of real estate tax or a land fee – residents and non-residents who own real estate or a plot of land must pay the associated taxes or fees; and
- failure to pay or incomplete payment of transport tax – according to Ukrainian tax law, residents and non-residents who own cars that are more than five years old and cost 375 times the minimum wage are subject to transport tax.
According to Ukrainian tax law, there are two types of indirect taxes – value added tax (VAT) and excise tax.
The most common taxable events that trigger VAT disputes include:
- cancellation of VAT taxpayer registration – a VAT taxpayer can be struck off from the special register according to the tax authorities' decision;
- failure or untimely registration of a tax invoice – the taxpayer should register a tax invoice on the day of occurrence of the tax liability;
- refusal of the tax authorities to refund VAT;
- failure to file or untimely filing of a VAT return – taxpayers have a duty to file a VAT return every year;
- VAT non-payment or incomplete VAT payment – a taxpayer must pay the personal income tax within 10 days of the last day of filing a VAT return;
- if the tax inspectorate concludes that any transactions made by the taxpayer were false; and
- determination of a VAT credit by the taxpayer.
The most common taxable events that trigger excise tax disputes include:
- non-registration or untimely registration as an excise taxpayer;
- non-payment or incomplete payment of excise tax – a taxpayer must pay the excise tax within 10 days of the last day of filing an excise tax return;
- failure to file or untimely filing of an excise tax return – taxpayers have a duty to file an excise tax return; and
- non-registration or untimely registration of an excise invoice.
Ukrainian law does not provide for stamp tax, but there is a stamp duty imposed on certain actions, such as:
- notarising contracts;
- notarising transactions with immovable property – the amount of the stamp duty in such cases is usually 1 per cent of the contract amount; and
- filing documents with a court, etc.
The procedure to be followed is usually similar for all these taxes. For example, it is common that after filing a tax return the tax authority submits a request for documents confirming the information mentioned in the tax return. Moreover, if the taxpayer does not provide the requested documents to the tax authority, the latter can conduct a documentary tax audit of such taxpayer.
Pursuant to Article 56 of the Tax Code of Ukraine, a taxpayer can appeal a decision of the tax authority to a higher-level authority and court. Moreover, this rule is relevant for all types of taxes.
A taxpayer has the right to file:
- a complaint with the higher-level authority within 10 business days of receiving the decision; and
- a claim with the court within 1,095 days of receiving the decision.
Furthermore, tax authorities have a right to initiate a tax dispute and may file a lawsuit to recover the tax debt. However, tax authorities do not have the same time limits as taxpayers. They have only 60 days from the day of sending the tax claim to the taxpayer to file a claim to the court. However, during the covid-19 epidemic, these time limits are much longer. During the quarantine period, the time limits are suspended and will be restarted only after the end of the quarantine.
In addition to the above, ADR mechanisms such as involvement of the business ombudsman and mediation are available to taxpayers to deal with tax disputes. More information about these mechanisms is provided in Section VII.
The courts and tribunals
The only courts in Ukraine that can deal with tax disputes are administrative courts, which include:
- 27 circuit administrative courts – the first instance;
- eight administrative courts of appeal – the second (appellate) instance; and
- the Administrative Court of Cassation – the third (cassation) instance.
Courts make up a separate branch of government that operates at the same level as the executive authorities, such as tax authorities. All of the Ukrainian courts are independent, which is the most important principle of the Ukrainian judiciary.
Before going to court, a taxpayer has the right to appeal the decision of a tax authority to a higher-level authority – the State Tax Service. This procedure is optional, which is why a taxpayer can go to court immediately. However, the Tax Code of Ukraine contains a rule stating that a taxpayer may not file a complaint with the State Tax Service if the decision of the tax authority has already been appealed in court.
According to recent practice, Ukrainian tax authorities very rarely overturn their decisions at the request of a taxpayer. It is likely that the decision of the tax authority will be overturned in court rather than in the State Tax Service. However, we still recommend using all the chances to deal with tax disputes during pretrial settlement of the dispute before going to court.
While dealing with a tax dispute, the case can be considered under the simplified procedure if it meets certain conditions. Before considering the case under this procedure the court must take into account the complexity and value of the issue in dispute.
The advantage of this procedure is that its duration is much shorter than the usual one – no more than 60 days. In this case, the court considers only written arguments, without calling the parties and holding a preparatory meeting. However, if the subject of the dispute is a large amount of money, the parties have a right to file a petition for consideration of the tax dispute under the usual procedure.
There are two levels of appeal in the Ukrainian judiciary. The first is an appellate jurisdiction, where both the taxpayer and the tax authority can appeal the decision of the first-instance court.
In accordance with the administrative procedural law, a party to the case who disagrees with the court's decision has the right to file an appeal. However, the court of appeal has the right not to accept an appeal in some cases, for example, if:
- the court's decision cannot be appealed at all – this is usually indicated in the decision;
- a party has previously waived an appeal against this decision;
- the court of appeal has already dismissed the previous appeal of a party; or
- a party has missed the deadline for filing an appeal.
The second level of appeal is a cassation jurisdiction, where a party can appeal the decision of the second-instance court. Cassation courts consider the correct application of the tax law by the courts of the first and second instances. The third-instance courts have no power to evaluate the evidence. According to the latest practice it is true that most tax disputes are resolved in the appellate or cassation courts because the tax authorities always file an appeal against the decision of a circuit administrative court if it is not in their favour, and the first-instance court sometimes does not take into account the arguments of the taxpayer and simply duplicates the position of the tax authorities.
Penalties and remedies
According to the Ukrainian legislation, there are three types of punishment that can be applied to taxpayers who violate the tax law:
- financial penalties;
- administrative liability; and
- criminal liability.
The tax authority has a right to impose financial penalties following the tax notification decision given to the taxpayer who allegedly violated the tax law. There are two types of financial penalties – a fixed fine and a fine that accrues as an interest for each day of violation. The circumstances in which the tax authorities can impose financial penalties are provided by the Tax Code of Ukraine. Some of them are listed below:
- violation of the established procedure for taxpayer registration;
- violation of the procedure for giving information about the taxpayer to the tax authority;
- failure to submit or untimely submission of tax reporting;
- untimely registration of tax invoices and adjustment calculations;
- violation of the procedure for registration of an excise invoice;
- failure to meet the deadline for submission of tax documentation;
- violation of simplified tax rules;
- calculation of the amount of tax liability by the controlling authority;
- violation of tax payment rules; and
- expropriation of property that is in tax lien without any permission of the controlling authority.
The tax authority usually imposes a financial penalty by issuing a tax notification decision based on the results of the tax audit.
The institution of guilt came into force in Ukraine from 1 January 2021. The tax reform provides that it will be possible to prosecute violations of tax law only if the tax authority proves the guilt of the taxpayer. However, this rule will not apply to some violations of tax law such as:
- expropriation of property that is in tax lien without the permission of the controlling authority;
- failure to file taxpayer's registration documents within the time limits mentioned in the Tax Code; and
- failure to notify the bank of the status of an entrepreneur while opening a bank account.
A taxpayer may challenge the imposition of financial penalties by appealing the decision to the State Tax Service or to the court using the procedures mentioned in Section III.
Pursuant to the Tax Code, taxpayers may also be subject to administrative and criminal liability. However, it is only courts – not the tax authorities – than can impose these types of penalties.
Article 212 of the Criminal Code provides that if the taxpayer intentionally does not pay taxes for the total amount exceeding 3,405,000 hryvnia, the court can impose criminal penalties such as:
- a fine of 51,000 to 425,000 hryvnia;
- deprivation of the right to hold certain positions or to engage in certain activities for up to three years; and
- confiscation of the taxpayer's property.
The Code of Administrative Offences specifies the following circumstances in which administrative penalties can be imposed:
- violation of the tax accounting procedure;
- failure to submit or untimely submission of payment orders;
- failure to meet the legal requirements of the tax authorities;
- violation of the income tax payment procedure;
- violation of the financial statements disclosure procedure;
- failure to submit or untimely submission of an income tax return; and
- transportation of alcoholic beverages and tobacco products without excise tax stamps, etc.
In case of criminal penalties, the taxpayer can challenge the imposition of these penalties by appealing the decision to the court of the next instance – the appellate and cassation courts. In case of administrative penalties, the taxpayer can go only to the second-instance court – not a cassation one.
In addition, financial, administrative and criminal penalties have different imposition procedures. Financial penalties may be imposed on companies, while administrative and criminal penalties may only be imposed on companies' officials.
Tax claimsi Recovering overpaid tax
In accordance with Article 43 of the Tax Code, taxpayers have a right to recover an overpaid tax. The recovery mechanism is similar for all types of taxes. Also, there is no difference in the treatment of foreign taxpayers compared to local ones.
To recover overpaid tax the taxpayer should submit an application to the tax authority. The recovery mechanism will apply provided that the following two requirements are met:
- a taxpayer must apply to the tax authority within 1,095 days of the date the tax was overpaid; and
- a taxpayer must not have a tax debt at the time of his or her application.
Moreover, the taxpayer has a right to use the overpaid tax to repay the tax liability using the same mechanisms. Besides, Ukrainian tax law has no provisions for the repayment of interest by the tax authority.ii Challenging administrative decisions
A taxpayer can challenge a decision on the grounds that it is contrary to policy, legitimate expectations or constitutional authority. It is illegal for a tax authority to impose a tax on a particular taxpayer that was, if applicable, waived previously or waived for other taxpayers. Based on the principles of tax law, a taxpayer cannot be obliged to pay the same tax twice. Moreover, all taxpayers are equal, so tax authorities may not collect taxes against a certain taxpayer only.
In such cases, a taxpayer has the right to initiate a tax dispute to restore his or her rights by referring the tax dispute to a higher-level tax authority or court.
One of the tax authorities' functions in Ukraine is to provide public and individual guidance to taxpayers. A tax authority may issue public guidance by providing:
- summarised tax guidance, which generalises individual guidance; and
- information letters, which contain information on how the Tax Code is applied, changes to the tax laws and answers to taxpayers' most common questions.
In addition, taxpayers may obtain free individual guidance from the tax authority about the practical implementation of certain tax law rules.
In the process of dealing with a tax dispute, a taxpayer may use such public and individual guidance to strengthen its position and arguments. But the key argument should be based on the norm of the Tax Code, rather than the tax authorities' words set out in the guidance. It is important to understand that public and individual guidance are documents that do not affect taxpayer's rights and obligations. Moreover, according to Clause 52.2 of the Tax Code, individual guidance is of an individual nature, meaning that it may be used only by the taxpayer to whom it was addressed.
If the taxpayer does not agree with the generalised or individual tax guidance it may appeal this in court, though it may only appeal against written guidance, not verbal. Since the issuance of tax guidance may lead to initiating a tax dispute, in some cases a court may decide to cancel the tax guidance. If so, the taxpayer is not responsible for actions taken in accordance with such tax guidance, nor will it be subject to any financial penalties imposed by the tax authority because of these actions.iii Claimants and related parties
According to the Ukrainian tax system, there is only one party who may reclaim tax from the tax authority – the party who lodged the tax return. There are no provisions determining remedies available to the party who bore the economic burden if the VAT was unlawfully charged to another party.
Moreover, a taxpayer does not have the right to challenge decisions issued to another party. Article 56 of the Tax Code provides that a taxpayer has a right to appeal a decision after such decision is available to the taxpayer. A taxpayer may receive the decision only if it was issued to them, rather than to a third party.
Moreover, there are no rules in Ukrainian tax law allowing tax authorities to collect underpaid or overclaimed tax from a supplier or customers if overpaid tax is reclaimed. That is why reclaiming overpaid tax may not affect connected parties – relationships between a taxpayer and tax authority have nothing to do with the other taxpayers, suppliers or customers.
As mentioned in the first chapter, costs incurred during a tax dispute are divided into:
- court fees;
- legal service costs;
- expenses incurred by the parties and their representatives related to the appearance in court or other bodies;
- expenses related to the involvement of witnesses, specialists and translators; and
- forensic expertise costs, etc.
If a taxpayer prevails in a tax dispute, he or she is entitled to recover these costs. While deciding on the distribution of costs, the court takes into consideration:
- whether the taxpayer's costs are related to the tax dispute;
- whether the amount of such costs is reasonable and proportional in view of the matter in dispute;
- the taxpayers' conduct at the time the court dealt with the tax dispute; and
- the actions of the taxpayer regarding the pretrial settlement of the dispute.
In practice, Ukrainian courts agree to award the full amount of legal service costs on rare occasions only. A court's key argument in such cases is that the amount of legal service costs is unreasonably large. The court's decision depends on the quality of the taxpayer's arguments and evidence of the legal service costs.
There are no rules in Ukrainian law that entitle the tax authority to seek an award of the costs incurred during a tax dispute. Even if a tax authority prevails in the tax dispute, a taxpayer would not be obliged to compensate the costs incurred by such authority.
Alternative dispute resolution
To resolve a dispute, a taxpayer may resort to the business ombudsman. According to this ADR mechanism, taxpayers have a right to file a complaint about a decision of the tax authorities to the business ombudsman, who will consider this complaint. However, the business ombudsman has no power to deal with tax disputes. Among other things, he or she may issue a detailed report outlining a recommendation to the tax authorities on how to deal with the dispute.
Taxpayers have the right to use this ADR mechanism only if they have already appealed the decision to the tax authority. The time limits are less than those for resorting to court – only one year after receiving the decision.
One of the ADR mechanisms mentioned in the Code of Administrative Proceedings is the settlement of a dispute with the participation of a judge. According to this mechanism, the judge holds consultations with or without the parties in order to resolve the dispute peacefully. There are only three conditions to apply this procedure:
- the trial has not actually begun;
- both parties have agreed to settle the dispute with the participation of a judge; and
- there are no third parties who make independent claims relating to the matter in dispute.
Mediation is a voluntary out-of-court settlement procedure that resolves conflicts through negotiations between the parties. This involves facilitators, mediators who are completely independent of the tax authority. Particularly, in November 2021, the Verkhovna Rada adopted Law No. 1708–IX on Mediation, which provides the legal principles and procedure for mediation, and mediator's duties and responsibilities.
However, using ADR mechanisms is not common in the Ukrainian practice of dispute resolution, and taxpayers usually prefer classic mechanisms since the Ukrainian law does not regulate ADR proceedings.
Currently, Ukraine is in the process of implementing mechanisms to combat tax evasion. In January 2020, the Verkhovna Rada adopted Law No. 466 on Amendments to the Tax Code of Ukraine on Improving the Tax Administration, Removing Technical and Logical Mismatches in the Tax Legislation. These large-scale amendments to the Tax Code are aimed at implementing the base erosion and profit shifting (BEPS) Action Plan in Ukraine.
This would mean introducing:
- the controlled foreign company (CFC) rules (BEPS action No. 3) (see Section X);
- rules preventing tax treaty abuse (BEPS action No. 6);
- the principal purpose test. This tax instrument is not a novelty in Ukrainian tax law, although Law No. 466 provides the rule under which the absence of a business purpose may have negative consequences for the taxpayer;
- the mutual agreement procedure (BEPS action No. 14). This procedure was designed to solve the problem of double taxation. As a matter of the Ukrainian tax law, a taxpayer may apply for consideration of the case under a mutual agreement procedure if he or she believes that the actions of the tax authority led to his or her double taxation;
- the concept of 'constructive dividends'. This concept recognises certain transactions with non-residents as dividends. As a result, such dividends should be taxed for the taxpayer; and
- the taxation of permanent establishments, etc.
By implication of Law No. 466, a foreign company is recognised as a tax resident in Ukraine if its place of effective management is in Ukraine.
As of today, BEPS steps as the mutual agreement procedure, principal purpose test and taxation of permanent establishment are already effective. However, the implementation of some of the rules (for example, CFC rules) was delayed until 1 January 2022 because they were not ready.
In summary, the Ukrainian tax system is not already compliant – further legislation is anticipated and includes many stages. It is hard to predict how these BEPS rules will work, but it is clear that Law No. 466 was perceived negatively by the Ukrainian business community, which believes that the tax reform of 2020 has many mistakes and inaccuracies, and in general increases the tax authority's influence on taxpayers. As a result, these amendments are expected to provoke a large number of tax disputes between the tax authorities and taxpayers.
Double taxation treaties
Ukraine has already signed double taxation treaties with 64 countries. These conventions have priority over domestic law, so if a norm of the double taxation treaty provides different rules to the Tax Code of Ukraine the double taxation treaty will be applied.
In Ukraine, a double taxation treaty may be applied only for two types of taxes: personal tax and corporation tax. Double taxation treaties do not apply to the indirect taxes, such as VAT and excise tax.
Areas of focus
The Ukrainian budget currently suffers from a lack of funds. This explains why the tax authorities are conducting inspections and seeking to impose penalties as much as possible. The tax authorities are particularly targeting large multinationals, taxpayers and companies that declare and pay large amounts of taxes.
Additionally, since 2020 there has been a specific area of developing tax law in Ukraine related to CFCs. The Ukrainian tax reform of 2019 provides that a CFC is a foreign legal entity or other organisation controlled by a tax resident of Ukraine. According to this concept, a taxpayer has a duty to pay 18 per cent income tax from the CFC. At the time of writing, this was due to come into force on 1 January 2022.
Currently, the IT industry is developing rapidly in Ukraine, which also affects the tax policy. In 2020 the Ukrainian government started to implement the idea of creating a virtual state in Ukraine called Diia City (meaning 'action city'). The Diia City is a special legal space for the IT industry that will help to create a powerful IT hub in Ukraine. According to this programme, IT companies receive a special taxation model. For example, it provides a withholding tax of 9 per cent for companies that are residents of Diia city.
Moreover, in June 2021, the Verkhovna Rada adopted Law No. 1525–IX, which imposes VAT on digital services provided by non-residents in the territory of Ukraine. Pursuant to this law, non-residents shall pay VAT on digital services if:
- such services are provided to individuals; and
- during the previous year, non-residents provided digital services worth more than 1 million hryvnia (US$37,100).
As provided by the above Law, the first reporting year for VAT on digital services is 2021.
Outlook and conclusions
A large number of tax disputes are typical of Ukraine since the tax authorities usually behave aggressively towards taxpayers. As a result, taxpayers defend their rights by initiating tax disputes.
Simultaneously, Ukrainian tax law is dynamic – it changes and develops every year. Therefore, it can be difficult for taxpayers to understand all aspects of tax legislation and communication with tax authorities.