"Reasonable economic reason (business purpose)" in the context of the Tax Code of Ukraine

In Ukrainian tax law, one of the key tools for monitoring compliance with the law is the concept of "reasonable economic reason (business purpose)". It directly affects the tax accounting of transactions and the determination of tax liabilities. For businesses, understanding this principle is critical, as it allows them to distinguish between real business transactions and artificial tax optimization schemes.

Definitions in the Tax Code

According to п. 14.1.231 of the Tax Code of Ukraine (TCU):

A reasonable economic reason (business purpose) is a reason that exists when the taxpayer intends to obtain an economic effect as a result of economic activity.

In other words, the transaction should be aimed not only at the formal transfer of assets or the creation of paper costs, but also at real achievement of economic results for the company.

Why do we need the concept of "business purpose"?

The Tax Code introduced this institution for:

• ⚖️ Combating fictitious transactions - when companies create "paper" expenses to reduce taxes.

• 💰 Counteracting aggressive tax planning - the use of intermediaries, offshore or other schemes without real business benefit.

• 📊 Protection of fair business - to ensure that honest transactions are not subject to unjustified additional charges.

Examples of transactions without a "business purpose"

1. Supplies between related companies at inflated prices only for cost formation.

2. Fictitious services (marketing, consulting without reports, proof of services rendered).

3. Transactions through offshore jurisdictionswhere there is no real economic content.

4. Splitting a business into several sole proprietorshipswhen it is done solely to reduce the tax burden, without logic in the organization of activities.

Criteria for having a business purpose

Tax authorities and courts take this into account:

• whether there is real economic effect (profit, growth in asset value, market expansion);

• is there documentary evidence (contracts, acts, reports, correspondence, commercial offers);

• whether the terms of the transaction are appropriate market (price, terms, conditions of delivery);

• whether the counterparty has resources to provide services or perform work (personnel, equipment, office).

Court practice

The Ukrainian courts have repeatedly sided with the tax authorities in disputes where the transactions did not make any real economic sense. However, if the company can prove that the transaction brought (or had the potential to bring) business benefits, the courts will recognize it as legitimate.

For example:

• advertising expenses may be recognized as reasonable even without a direct increase in sales if the campaign was aimed at promoting the brand;

• investments in a new business line with potential future profits may also meet the "business purpose" criterion.

How can a business prove the existence of a business purpose?

1. Prepare a full package of documents (contracts, acts, reports, terms of reference).

2. Record economic calculations (business plans, financial models, expected effect).

3. Choose counterparties with real activities (personnel, resources, assets).

4. Keep internal communication documented (meetings, memos, e-mail).

Conclusion.

Concepts. "reasonable economic reason (business purpose)" has become one of the main mechanisms of tax authorities' control over business. It requires that each business transaction has real substance and is justified in terms of economic benefit.

For entrepreneurs, this means:

• avoid fictitious transactions,

• thoroughly document transactions,

• think not only about the tax effect, but also about real value for business.

Only then will tax accounting be secure and disputes with regulatory authorities be minimized.