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Finance Business Service

New Supreme Court, the first “new” legal positions: What to expect and what to hope for?


Despite all the advantages and disadvantages of the judicial reform that is taking place in Ukraine, the legal community and business nevertheless have placed certain hopes on the new Supreme Court and its focus on the rule of law, as well as on the fact that when considering cases and forming legal positions, it will take into account the practice of the European Court of Human Rights.
Such hopes were not groundless, as Article 6 of the Code of Administrative Procedure of Ukraine indicates that “the Court applies the principle of the rule of law, taking into account the jurisprudence of the European Court of Human Rights” (other procedural codes contain similar provisions).
Part 1 of Article 36 of the Law of Ukraine “On judicial system and status of judges” states: “The Supreme Court is the highest court in the judicial system of Ukraine, which ensures the constancy and unity of judicial practice in the order and manner prescribed by the procedural law”.
It's no secret that there have been absolutely opposite positions of the courts for many years regarding the application of tax consequences in that case when a court verdict (or only the director’s explanations) on the recognition of fictitious activity of one of the counterparty appears in the case (Article 205 of the Criminal Code of Ukraine).
In this case, the opposite positions arose mostly between the Supreme Administrative Court, which was on the side of the taxpayer, and the Supreme Court of Ukraine, which, without establishing the guilt, placed certain duties to the taxpayer or deprived him of certain rights. The last one has formed the following position: “The status of a fictitious, illegal enterprise is incompatible with legal entrepreneurial activity. The economic operations of such enterprises can not be legalized even with formal confirmation by accounting documents”.
In our opinion, this position is erroneous, at least within the framework of the current legislation of Ukraine. And this has been repeatedly stressed by the European Court of Human Rights.
At a minimum, the judges are aware of the ECHR Judgment - “Bulves” Joint-stock company v. Bulgaria” of 22.01.2009 (Application No.3991/03), where the court has formed the following position:
“If the recipient of goods that are delivered is a person with the status of a taxpayer who did not know and could not know that the transaction that is being considered is related to fraud from the seller (Article 17 of the Sixth Council Directive 77/388 / EEC of 17 May 1977 on the harmonization of the legislation of the EU Member States with regard to turnover taxes), the general system of value added tax - a single assessment basis, taking into account the changes introduced by the EU Council Directive 95/7/EU of 10 April 1995 - should be interpreted as such one that excludes the norm of the national law, according to which the fact that the sale transaction is considered invalid - by virtue of the provisions of civil law, according to which such a transaction is recognized as insignificant as such one that is contrary to public order and is carried out on unlawful grounds by the seller - this results in the deprivation of the taxpayer of the right to a tax credit. In this context, it does not matter whether the operation is void due to fraudulent evasion of payment of VAT or any other fraud (P. 32)”.
To our great regret, the Supreme Court consistently and unreasonably continued the questionable and controversial practice of the Supreme Court of Ukraine in tax cases in which, in the presence of a court verdict against counterparty’s official under Article 205 of the Criminal Code of Ukraine, the burden of liability for paying value added tax or reduction its negative value fell on the taxpayer (Decree of the Supreme Court of 16.01.2018, case 2a-7075/12/2670, K/9901/1478/18).
It is very strange that the Supreme Court, starting its jurisprudence, does not substantiate its position from the point of view of the rule of law, does not take into account the practice of the European Court of Human Rights, and in support of its position, it only makes reference to the practice of the Supreme Court of Ukraine for 2015. This would be clear, if such practice was referred to by the lower courts. But when the Supreme Court admits this, certain questions arise.
At a minimum, this indicates that the Supreme Court did not really seek to form a truly normatively substantiated, legal position that would ensure the stability and unity of judicial practice.
It is still a big issue in which part of the procedural legislation of Ukraine the Supreme Court has found such an order and way of substantiation of its position as a reference to the practice of the Supreme Court of Ukraine. (?!!) It should be noted here that the practice of the Supreme Court of Ukraine on this issue had a very controversial legal basis, so the reference to it in the decisions of the Supreme Court has caused considerable surprise to the legal community.
There is no question that the given category of cases contains an exceptional legal problem. After all, such cases are not uncommon, this is a whole “layer” of cases and, as practice shows, law enforcement on this issue (despite the legal position of the SCU) is quite different. And this, in turn, necessitates the formation of a single law enforcement practice (for this reason in fact, the Supreme Court was created).
To our great regret, the board of judges of the Court of Cassation did not pay any attention to this and did not use the right to refer the case to the joint Chamber or the Grand Chamber of the Supreme Court, as provided by Article 346 of the CCU (the Court of Cassation of Ukraine).
That is, unfortunately, today the situation on this issue has remained the same.
However, we continue to monitor the practice of the Supreme Court and highlight the legal positions that are formed by it.

Ролан Бондарец
Lawyer in tax disputes
Finance Business Service