Fine of Over 7.6 Million UAH Overturned: Axel Legal Defended the Business in a Dispute Over the Results of an On-Site Inspection

Team. Axel Legal successfully defended the interests of a Ukrainian company operating in the premium alcoholic beverages market in a dispute with the tax authority following the results of an on-site audit. The regulatory authority imposed penalties on the company in the amount of over 7.6 million UAH, citing the alleged storage of alcoholic beverages in a facility not listed in the Unified Register of Storage Facilities for Alcoholic Beverages. The courts of first and appellate instance agreed with the defense’s position and overturned the tax assessment notice.

The Essence of the Dispute

The tax authority conducted an on-site audit of the company to verify its compliance with laws governing the production and distribution of alcoholic beverages. Based on the results of the audit, a report was drawn up in which the tax authority concluded that alcoholic beverages were allegedly being stored in a warehouse not listed in the Unified Register of Storage Facilities for Alcoholic Beverages.

Based on this audit, the tax authority issued a tax assessment notice and imposed a fine of more than 7.6 million UAH on the company.

The company disagreed with these conclusions and filed a lawsuit to protect its rights.

What was unique about the case?

What made this case unique was that the defense was not based solely on refuting the tax authority’s conclusions on the merits. The Axel Legal team placed particular emphasis on the procedural violations committed by the tax authority when documenting the results of the on-site audit and issuing the tax assessment notice.

After receiving the audit report, the taxpayer submitted objections, explanations, and documents confirming that no violation had occurred. Specifically, the company’s position was that the presence of the products in the additional premises was related to technological and operational processes—such as packaging, filling, preparing goods, and other related activities.

However, the regulatory authority failed to ensure that these objections and documents were properly reviewed.

This was of fundamental importance in the tax dispute: if a taxpayer filed objections to the audit report, the tax authority was required not merely to go through the motions but to genuinely consider them, evaluate the arguments and documents, and only then make a decision.

The Defense's Position

Team. Axel Legal argued that the tax assessment notice was unlawful based on two key sets of arguments.

First of all, the tax authority’s conclusions regarding the merits of the dispute were unfounded. The mere fact that the products were temporarily stored in an additional facility does not automatically indicate the illegal storage of alcoholic beverages if such products were kept there as part of business processes related to the packaging, bottling, and handling of the goods.

Second,, the regulatory authority committed a significant procedural violation—it failed to ensure a proper review of the objections to the audit report and did not provide a substantive assessment of the taxpayer’s documents and explanations. The defense’s position was that the tax authority cannot first ignore the business’s explanations and then base a multimillion-hryvnia fine on the formal conclusions of the audit report.

Result

The trial court agreed with the defense's position, ruled that the tax assessment notice imposing a fine in the amount of 7,651,069.35 UAH.

The tax authority filed an appeal, but the appellate court dismissed it and upheld the decision of the trial court.

As a result, the business was fully protected from a fine of over 7.6 million UAH, and the tax assessment notice was definitively invalidated.

Why This Is Important for Business

This case illustrates an important practical lesson: in disputes arising from the results of on-site inspections, it is necessary not only to defend against the substance of the regulatory authority’s claims but also to carefully verify compliance with the procedure.

An on-site audit does not give the tax authority the right to disregard the taxpayer’s documents or to take a purely formal approach to considering objections. If the procedure is violated, this may constitute an independent and substantial ground for revoking the tax assessment notice.

For companies operating in the excise goods market, this conclusion is particularly important. Such businesses are subject to heightened scrutiny by regulatory authorities, so accurate recording of business processes, proper documentation, and active defense during the objection and litigation phases are of critical importance.

Conclusions.

1. The procedure is significant in its own right. Significant procedural violations on the part of the tax authority—in particular, the improper consideration of the taxpayer’s objections—may constitute a separate ground for revoking a tax assessment notice, regardless of the substance of the claims.
2. The tax authority's formal approach does not stand up to judicial scrutiny. The mere fact that products are located in an additional facility does not automatically constitute evidence of illegal storage if this is due to legitimate business processes—such as packaging, filling, or preparing the goods.
3. Objecting to an audit report is not just a formality. Well-prepared objections, accompanied by explanations and supporting documents, form the evidentiary basis for a future legal dispute and document any violations by the regulatory authority should it choose to ignore them.
4. Taking a proactive approach yields results. Consistent legal representation in two courts resulted in the business being fully exempted from a fine of over 7.6 million UAH.

Tips for Customers

If your company is facing an on-site audit or has received a tax assessment notice, we recommend that you:

• Keep a record of the audit process. Verify that there are legal grounds for the on-site inspection, that the order and referral have been properly issued, and that the procedure for conducting the inspection has been followed.
• Carefully review the audit report. Errors, inaccuracies, and unfounded conclusions in the report will serve as grounds for future legal arguments.
• Be sure to file an objection. Include explanations and documents that confirm the actual substance of the business transactions with your objections. This is a critically important step that must not be overlooked.
• Document business processes. For businesses operating in the excise goods market, the proper documentation of product movement—including packaging, portioning, and movement between facilities—must be systematic rather than ad hoc.
• Check to see if your objections have been addressed. If the regulatory authority has disregarded your arguments and documents, make a record of it—such a violation may constitute grounds in and of itself for the fine to be rescinded.
• Don't delay in filing a lawsuit. The time limits for filing appeals are strict, and the quality of the case preparation at the outset determines the outcome at all levels of the court system.

Axel Legal continues to represent businesses in tax disputes—from analyzing audit reports and preparing objections to providing full legal representation in all courts.

Author of the article: Vitaliy Bodiuk,
managing partner Axel Legal, attorney specializing in tax and administrative law