Court supported position of tax authorities regarding the increase of monetary personal income tax liability

Press service of the State Tax Service of Ukraine, published 18 December 2023 at 11:50 Chapter: News

Cassation court supported the controlling body's position regarding legality of increasing personal income tax liability and application of financial sanctions.

Panel of judges agrees with conclusions of the courts of previous instances that complex of consecutive purposeful actions of the plaintiff in sale of real estate (courts established that the plaintiff sold twenty-three houses) is a systematic activity. Panel of judges notes that the specified sales activities cannot be qualified as those that were aimed at satisfying the plaintiff's own (personal) needs, and, therefore, this is evidence that relevant activity (purpose of which is to make a profit) for taxation purposes should qualify as entrepreneurial.

At the same time, panel of judges draws attention to the fact that the mere fact of signing contracts for the purchase and sale of real estate without specifying the plaintiff’s status as entrepreneur is not evidence that such operations are unrelated to entrepreneurial activity.  

The Supreme Court concluded that courts in taxation matters (in particular, income received by the plaintiff for relevant tax period, obligation to register as the value-added tax payer and withhold VAT from such operations on a general basis) should proceed from the fact that person does not have relevant legal status in such legal relationship due to neglect of the established legislative requirements and absence of legal coercion mechanism, cannot serve as obstacle to the application of taxation rules established by Article 177 of the Tax Code of Ukraine to income received by the plaintiff. Therefore, legislator, formulating content of Article 177 of the Tax Code of Ukraine, in view of general legal principle of good faith, could not foresee such illegal behavior of taxpayer who would ignore provisions of current tax legislation and, in essence, carry out entrepreneurial activity within the limits of disputed legal relations not as individual-entrepreneur, while having such legal status during period checked by the controlling body.

Cassation court emphasized that the specified behavior of the plaintiff indicates that such person creates conditions that cannot be aimed at anything other than non-fulfillment of requirements of tax legislation (in particular, avoidance of tax liability). In fact, in this way, person artificially creates conditions for not applying to him requirements of Article 177 of the Tax Code of Ukraine regarding procedure of income taxation from the economic activities of individuals-entrepreneurs. Such actions are carried out purposefully, the purpose of which is to avoid tax liability by minimizing tax liabilities from the personal income tax and VAT.

The Supreme Court agreed with conclusions of the controlling body that the plaintiff's activity for taxation purposes should be qualified precisely as entrepreneurial, legal consequences should be applied to him as a person with status of "individual-entrepreneur", which conditions application of taxation rules established by Article 177 of the Tax Code of Ukraine to income received by the plaintiff, and formal failure of the plaintiff to indicate appropriate legal status within the disputed legal relationship, provided that the specified essential criteria exist, cannot be the basis for exempting from taxation of activities carried out by him in the established by tax law amount.

Therefore, the Cassation Administrative Court as part of the Supreme Court on 04.12.2023 in case № 480/4636/19 dismissed the plaintiff’s cassation appeal; decision of the Sumy District Administrative Court as  of 09.12.2020 and decision of the Second Appeal Administrative Court as of 19.08.2021 were left unchanged.