Combating Adverse Tax Effects of Documents Destroyed by War

Each day Ukraine suffers from massive shelling from Russia. As a result, Ukrainian businesses lose not only their assets but also the documents crucial for tax and accounting purposes. As a general rule, the lack of underlying documents usually means that the taxpayer is not allowed to book and report the respective figures, deduct expenses, and enjoy VAT credit and/or refund.

Bearing this in mind, in April 2022, subchapter 10 of chapter XX of the Tax Code of Ukraine was supplemented by paragraph 69.28 dealing with related issues. In particular, it establishes special rules for those taxpayers who carried out their business activities on territories occupied by the Russian Federation or territories affected by active hostilities which resulted in the loss of the primary documents needed to confirm tax and accounting figures.

According to the special rules mentioned above, if a taxpayer loses documents or access to them, it has to notify the tax authorities of this fact. The notification shall describe the circumstances that resulted in the loss of the documents and/or access to them, the reporting periods to which such documents pertain, and a list of such documents. Once such notification is accepted by the tax authorities, it serves as a ground for preserving the respective tax and accounting figures by the taxpayer. More importantly, it results in an absolute moratorium on tax inspections regarding the reporting periods covered by the aforementioned notification. This moratorium survives even the termination of martial law in Ukraine.

The list of territories occupied by the Russian Federation or territories affected by active hostilities shall be approved separately. Currently, it is established by the Order of the Ministry of Reintegration of Temporarily Occupied Territories of Ukraine dated 22 December 2022 No. 309 On Approval of the List of Territories Affected by Active Hostilities or Temporarily Occupied by the Russian Federation. Before that, the respective list was established by the Order of the Ministry of Reintegration of Temporarily Occupied Territories of Ukraine dated 25 April 2022 No. 75.

However, in practice, the tax authorities tend to deny, massively, accepting the above notifications. In their decisions on the matter, the tax authorities usually state that the given taxpayer failed to provide due evidence. As a result, the tax authorities state that such taxpayer has no right to enjoy the abovementioned incentives provided by paragraph 69.28 of subchapter 10 of chapter XX of the Tax Code of Ukraine.

Below we will list the key problematic issues that arise in the taxpayer’s communication with the tax authorities which result in the denial of the taxpayer’s right to use paragraph 69.28 of subchapter 10 of chapter XX of the Tax Code of Ukraine.

First of all, the tax authorities pay close attention to the evidence confirming that the exact documents were located at the exact moment in the exact place/premises within the territories occupied by the Russian Federation or territories affected by active hostilities.

Secondly, the tax authorities study the cause-and-effect relation between the destruction of documents and war very carefully. In other words, the mere location of the documents within a territory affected by the war does not automatically mean that such documents fall within the scope of paragraph 69.28 of subchapter 10 of chapter XX of the Tax Code of Ukraine.

From a practical perspective, to identify the location of the exact documents at the given moment, the taxpayer should provide the following documents along with the notification:

• Documents confirming the taxpayer’s right to the premises in which the respective documents were stored (storage/archiving services agreements, agreements on lease of premises, documents confirming ownership title to premises, etc.);
• Evidence that the respective agreements were actually executed by the parties, such as bank statements on fee payments, protocols on acceptance of services, etc.;
• Evidence that the particular documents were actually located at the given locations, such as the protocols of transfer-and-acceptance of the documents (if storage services are provided by a third party) or some documents on the internal movement of the documents for storage (such as internal orders, internal document storage policies, etc.);
• Evidence that registration formalities with regard to the respective premises were met by the taxpayer (such as special tax forms that have to be filed with regard to real estate owned or leased by the taxpayer, e.g., form 20-ОПП; extracts from the state registers regarding a taxpayer’s rights to real estate etc.).

To prove the cause-and-effect relation between the destruction of documents and Russian aggression, the following should be provided by the taxpayer:

• Evidence confirming that the taxpayer performed the formalities required in the case of destruction of documents. Such formalities include: an internal order on the formation of an inventory commission and carrying out an internal investigation and inventory concerning documents stored or transferred for storage and destroyed/lost due to the war; the inventory act; notification to the police or other law enforcement agencies regarding the destroyed/missing documents;
• Other documents that may be composed by the provider of storage premises/services and the owner of the destroyed documents, e.g., acts on mutual investigation of destroyed premises etc.;
• Evidence on the destruction of documents and/or the premises of their location issued by authorized institutions, such as local municipal authorities, police and other law enforcement agencies, fire departments, or chambers of commerce and industry. It should be noted that certificates on force-majeure issued by chambers of commerce and industry can be very helpful in proving that specific documents were lost due to Russian attacks as force-majeure circumstances.

Another important issue is to confirm before the tax authorities that the territory in question was on the list of territories given by the above-mentioned order(s) of the Ministry of Reintegration of Temporarily Occupied Territories of Ukraine. In practice, the tax authorities thoroughly examine the exact geographical location of the premises in order to eliminate any located outside the listed territories. This means that the taxpayer should provide official confirmation that the address of a certain location is actually in the listed territory. Respective confirmations can be found in the title or registration documents to premises and also obtained from local municipal authorities in the form of references issued by them.

Another practical problem here is that paragraph 69.28 of subchapter 10 of chapter XX of the Tax Code of Ukraine was introduced in April 2022, i.e., more than a month after massive destruction had already begun. This fact gives rise to the question of whether paragraph 69.28 can apply retrospectively to those documents destroyed before it came into effect.

In our opinion, the answer to this question is positive as the key purpose of introducing the paragraph was to address cases happening since the full-scale Russian invasion which began on 24 February 2024. The wording of this paragraph refers to events in the past, which points towards its retrospective application: taxpayers who carried out their business activities; territories on which the hostilities took place, etc. Moreover, the Law of Ukraine No. 2173-IX dated 1 April 2022, which introduced paragraph 69.28, states that it was enacted specifically due to the Russian aggression against Ukraine.

What can taxpayers do once the tax authorities deny them the application of paragraph 69.28 of subchapter 10 of chapter XX of the Tax Code of Ukraine? There are two options here: one is to try taking into account the arguments given in the denial (i.e., to re-submit the application supplemented with additional evidence and explanations), and another option is to challenge the denial in court. These two options can be combined: if the second application is denied, the taxpayer may challenge the denial in court.

According to the existing court practice, courts are reluctant to grant the claim to impose a moratorium on tax inspections. Usually, courts satisfy the following claims: (i) to recognize as illegal the denial of the tax authorities to apply the abovementioned paragraph 69.28, and (ii) to oblige the tax authorities to re-consider the taxpayer’s application having regard to the court’s conclusions. This means that courts are unwilling to directly impose the moratorium by their judgments. Instead, they tend to instigate the tax authorities to do so.

As follows from the latest practice of the Supreme Court of Ukraine, it usually denies opening the proceedings under cassation appeals in disputes regarding the application of paragraph 69.28 of subchapter 10 of chapter XX of the Tax Code of Ukraine. The ground for that is that the Supreme Court considers this category of cases as insignificant and therefore not subject to revision according to paragraph 2 of Article 328 of the Code of Administrative Proceedings of Ukraine. For example, see rulings of the Supreme Court in cases No. 160/12973/22, 160/2644/23, 160/18083/22, 520/12857/23, 400/2407/23.

The above approach of the Supreme Court to a certain extent limits taxpayer’s options. Given this, the taxpayer has to put maximum thought and effort into defending its position in the court of first instance and the court of appeal. Preparing and submitting the documents mentioned above should help the taxpayer defend its position with maximum efficiency.

By Halyna Melnyk, Deputy Director for Ukraine and Tax Desk leader at Peterka Partners