Court supported tax authorities' position regarding legality of made decisions

Press service of the State Tax Service of Ukraine, published 19 March 2024 at 10:00 Chapter: News

Cassation court supported the controlling body's position regarding legality of decisions that increased amount of the plaintiff's monetary liability from the "military levy", added obligation to pay single tax by individuals and applied financial sanctions.

Analyzing the plaintiff's argumentations that he acted as individual, and not as individual-entrepreneur, within the disputed legal relationship regarding sale of real estate, the Supreme Court indicated the following: "individual-entrepreneur" and "individual" have different legal status, including in taxation sphere. Individual who wishes to exercise constitutional right to entrepreneurial activity, after passing relevant registration and other procedures prescribed by the law, does not under any circumstances lose or change status as individual, which he/she acquired from the moment of birth, but only acquires a new sign for it – entrepreneur. It should be noted that acquisition by individual of legal status of " individual-entrepreneur" is not a restriction of such person's constitutional rights regarding freedom of entrepreneurial activity, but primarily acquisition of such legal status that certifies right of this individual to involve in independent, proactive, systematic, on own risk of economic activity with an aim of achieving economic and social results and obtaining profit.

The Supreme Court noted that legal status of "individual-entrepreneur" in itself does not in any way limit any rights of individual arising from his/her civil law and legal capacity. That is, individual, being in status of a subject of entrepreneurial activity, can carry out contractual relations on own behalf, as individual, at the same time, the following should be taken into account: carrying out entrepreneurial activity by individual, it is necessary to clearly distinguish in which relations individual acts as entrepreneur and in which as individual. In this case, complex of consecutive purposeful actions of the plaintiff in sale of real estate (courts established that twenty-three houses were sold by the plaintiff) should be qualified precisely as a systematic entrepreneurial activity. At the same time, the mere fact of signing the specified contracts of sale and purchase of real estate without specifying the plaintiff’s status as entrepreneur is not evidence of the non-connection of such operations with entrepreneurial activity.

The Supreme Court also noted that courts in matters of taxation should proceed from the fact that individual’s lack of appropriate legal status in such legal relationship, due to neglect of such established legislative requirements and absence of legal mechanism of coercion, cannot serve as an obstacle to the application of taxation rules to income received by the plaintiff, established by Article 177 of the Tax Code of Ukraine, as the legislator, formulating content of Article 177 of the Tax Code of Ukraine, taking into account general legal principle of good faith, could not foresee such illegal behavior of the taxpayer who would ignore provisions of current tax legislation and, in essence, carry out entrepreneurial activity within limits of disputed legal relations not as individual-entrepreneur, while having such legal status during the period that was checked by the controlling body.

Such individual’s behavior indicates that such individual creates conditions that cannot be aimed at anything other than non-fulfillment of requirements of tax legislation (in particular, avoidance of tax liability). Appropriate conditions can be created at any stage of economic activity, even before its actual start. In fact, in this way, individual artificially creates conditions for not applying requirements of Article 177 of the Tax Code of Ukraine regarding taxation procedure of income from economic activities of individuals-entrepreneurs. Such actions are carried out purposefully, their purpose is to avoid tax liability by minimizing tax liability from the personal income tax and VAT, and according to Paragraph 109.1 Article 109, they qualify as illegal actions.

In view of the above specified justification, the panel of judges agrees with conclusion of the Court of first instance that in this case the plaintiff's activity for taxation purposes should be qualified as entrepreneurial, and legal consequences should be applied to him as individual with status of "individual-entrepreneur", which determines application of taxation rules to income received by the plaintiff, established by Article 177 of the Tax Code of Ukraine, and formal non-indication by the plaintiff within limits of disputed legal relationship of relevant legal status, provided that the specified essential criteria exist, cannot be basis for exemption from taxation of activity carried out by him in the amount established by tax legislation.

Cassation administrative court as a part of the Supreme Court on 07.03.2024 in case № 480/293/20 satisfied cassation appeal of Main Directorate of the State Tax Service in the Sumy region; decision of Second administrative court of appeal as of 05.11.2023 was canceled; decision of Sumy district administrative court as of 17.11.2021 was left in force.