Team. AXELLEGAL successfully defended the interests of a Ukrainian company operating in the premium alcoholic beverages market in a complex tax dispute that arose following a scheduled documentary audit.

The regulatory authority concluded that there had been an alleged underreporting of income tax and value-added tax. Based on the audit report, tax assessment notices were issued imposing additional tax liabilities in the amount of millions of hryvnias.

The courts upheld the defense's position, and the tax assessment notices were fully revoked.

The Essence of the Dispute

The tax authority conducted a scheduled on-site audit of the company to verify its compliance with tax, foreign exchange, and other laws.

Based on the results of the audit, the regulatory authority issued a series of claims against the taxpayer.

The tax authority's main findings focused on two areas:

• the incorrect reporting of revenue, in the opinion of the regulatory authority, in connection with the discounting of debt under a loan agreement with a nonresident;
• the alleged failure to substantiate certain business transactions, which, in the tax authority’s view, affected the calculation of expenses and the VAT tax credit.

Based on these findings, the companies were assessed significant additional tax liabilities.

What was the unique aspect of the case?

This dispute was not limited to the formal question of whether or not certain documents existed.

In fact, the regulatory authority questioned:

• the economic substance of individual transactions;
• the accuracy of accounting;
• the accuracy of the tax reporting of the company's business activities.

Discounting a Loan

A separate part of the dispute concerned the discounting of accounts payable under the loan agreement.

The tax authority believed that the company should have recognized additional income from discounting.

The defense argued that this approach is flawed because the regulatory authority:

• incorrectly applied the calculation methodology;
• did not take into account the actual terms of the contract;
• ignored the interest-bearing nature of the loan.

Business Transactions

Business transactions with counterparties became another point of contention.

The tax authority effectively cast doubt on the authenticity of services related to:

• brand development;
• product promotion;
• marketing activities;
• consulting;
• organizational support for the business.

The Defense's Position

Team. AXELLEGAL argued that the regulatory authority’s conclusions did not correspond to the actual facts of the case and were unfounded.

Regarding Discounting

The defense’s position was based on the argument that the tax authority cannot arbitrarily apply a mathematical calculation model without taking into account:

• the terms of a specific contract;
• the economic substance of a financial liability;
• interest that was to be charged on the loan.

In determining the tax consequences, it is not the formal calculation that is decisive, but rather the actual substance of the financial transaction and the accounting rules.

Regarding Business Transactions

The defense team emphasized that all of the disputed services were directly related to the company’s actual business operations and had a clear business purpose.

They were used for:

• business development;
• product promotion;
• increasing brand awareness;
• sales organization;
• ensuring the company's effective operation.

It has been separately established that formal objections to the content of documents or the level of detail in source documents cannot automatically indicate that business transactions are fictitious.

If a transaction actually took place, is related to the taxpayer’s business activities, and is supported by a body of evidence, the tax authority has no right to disregard its actual substance.

Outcome of the case

The trial court agreed with the defense's position on the key arguments regarding income tax and overturned the corresponding tax assessment notice.

Subsequently, the appellate court further considered the company’s arguments regarding value-added tax and concluded that the claim should be granted in full.

As a result:

• The tax assessment notices were completely revoked;
• the business was protected from significant additional tax assessments;
• The taxpayer's position was upheld by the courts.

The tax authority attempted to appeal the court decisions in cassation, but The Supreme Court denied the request to initiate cassation proceedings.

Why This Issue Is Important for Business

This case serves as a cautionary example for companies undergoing documentary tax audits.

It reaffirms several important principles.

The tax authority cannot arbitrarily determine tax consequences

The tax authority does not have the right to automatically determine revenue or tax liabilities solely on the basis of its own calculation model without taking into account:

• the terms of the contracts;
• the economic substance of transactions;
• accounting principles.

The feasibility of operations is assessed comprehensively

The presence or absence of certain formal requirements is not decisive.

The court evaluates all the evidence as a whole:

• contracts;
• stocks;
• reports;
• payment;
• actual use of services;
• the economic purpose of the transactions;
• their connection to the company's business activities.

Documents must not only be submitted, but also properly justified

In tax disputes, it is important not only to submit the documents but also to explain to the court:

• how exactly they are related to the company's activities;
• what circumstances confirm;
• which serve as evidence of the reality of business transactions.

For businesses operating in the excise goods market, this is particularly important, as such activities are subject to heightened scrutiny by regulatory authorities.

That is precisely why every stage—from preparing documents to providing legal defense in court—requires a professional and systematic legal approach.

AXELLEGAL Defends Businesses in Tax Disputes

Team. AXELLEGAL continues to represent businesses in tax disputes of any complexity—from analyzing audit reports and preparing legal arguments to providing full legal representation in courts of all levels.

Author of the article: Vitaliy Bodiuk