Ilyashev & Partners | View firm profile
Ivan Maryniuk, Head of Tax Law Practice at Ilyashev & Partners Law Firm
As Ukraine adapts its tax system in the context of war and economic recovery, foreign businesses are facing a growing number of tax-related legal disputes. The establishment of the Economic Security Bureau, new digital reporting obligations, and wartime fiscal pressures have transformed the state’s approach to tax enforcement.
In this environment, multinational companies and cross-border groups operating in Ukraine increasingly encounter unexpected VAT adjustments, corporate profit tax claims, and withholding tax (WHT) assessments – even during routine operations. These developments demand proactive tax risk assessment and the implementation of a robust legal defense strategy.
Tax Control Authorities and Powers
When it comes to taxation in Ukraine, business primarily interacts with two key government agencies: the State Tax Service of Ukraine (STS) and the Economic Security Bureau of Ukraine (ESB).
The STS is the main tax control authority in Ukraine. It is responsible for administering taxes, conducting tax audits, requesting information about counterparties, primary documents, and invoices, as well as blocking tax invoices and initiating audits if there are signs of fictitious transactions aimed at minimizing the tax burden.
The ESB has become an equally important part of the tax control system, especially in criminal cases. It can initiate proceedings for tax evasion, conduct searches, interrogations, and initiate the seizure of documents or the freezing of accounts.
The interaction between these agencies creates the practical reality of tax control, for which any business operating in Ukraine must be prepared.
Common Dispute Triggers for Multinationals
In practice, international companies operating in Ukraine directly or through local subsidiaries face several recurring tax issues. Some of these relate to standard audits and administration, while others relate to the specific interpretation of tax legislation or new approaches by the regulatory authorities. This section briefly reviews the most common issues that give rise to tax disputes or risks for multinational businesses.
“Non-Existent Transactions” in Tax Disputes: A Common but Contested Risk
One of the most frequent grounds for challenging VAT credit and expense deductions by the State Tax Service (STS) is the alleged fictitious nature of transactions. The tax authorities claim that a transaction is formal if there is no evidence of the actual movement of goods, performance of work, or provision of services. These conclusions are often based on the supplier’s so-called ‘analytical profile’: insufficient staff, lack of transport, premises, or technical resources.
This argument is particularly common in areas where it is difficult to trace the material component of a transaction or to compile a complete set of supporting documents. This applies to agribusiness, logistics, trading and IT, where the physical movement of goods or the provision of services is difficult to trace through documentation.
In such cases, the tax authorities tend to refer to a ‘lack of economic substance’, which often becomes the basis for additional income tax and VAT charges and, in some cases, the initiation of criminal proceedings. At the same time, case law in such disputes varies, and the outcome in favour of the taxpayer largely depends on proper preparation for tax audits and the documentation of business transactions.
Transfer Pricing in Ukraine: Key Risks and Practical Guidance
For multinational companies operating in Ukraine, transfer pricing (TP) remains one of the most sensitive areas of tax compliance. Tax authorities are becoming increasingly rigorous in verifying whether controlled transactions adhere to the arm’s length principle.
The most common grounds for tax adjustments are discrepancies between declared prices and market prices or prices in comparable transactions, as well as the lack of proper functional analysis. The focus is on: supplies of raw materials or finished products between related parties, engineering or marketing services, and license payments.
The tax authorities often interpret price deviation as an attempt to transfer profits abroad, resulting in additional income tax, penalties, and interest. The situation is complicated if the taxpayer cannot provide proper documentation or justification, especially in cases of transactions with counterparties from low-tax jurisdictions.
Proper preparation of TP documentation, timely reporting, and consulting with experts before an audit are critical to avoiding risks and protecting the company’s position.
Permanent Establishment (PE) Risk: What Foreign Companies Must Know
One of the current areas of tax control is identifying signs of foreign companies operating in Ukraine without proper registration of a permanent establishment (PE). This refers to situations where a business conducts economic activities in Ukraine through establishments (non-commercial), agents, local partners, or staff, but does not declare its presence to avoid taxation of profits. Such a hidden presence can have significant consequences.
The tax service is initiating more and more audits in such cases and proving in court that a foreign company has a PE, even without its official registration, or that an existing non-commercial establishment is carrying out activities of a commercial nature. If such status is proven, the tax authorities recalculate the income, determine the notional profit of the PE, and impose additional income tax and penalties.
Court practice on this issue is rapidly developing and often not in favour of the taxpayer. For international business, this means that it is necessary to carefully analyze the existence of an ‘economic presence’ in Ukraine. Particular attention should be paid to employment and agency contracts, local operational activity, and public communication.
Withholding Tax in Ukraine: New Standards and Court Practice
Cross-border payments of passive income (dividends, interest, royalties) to non-residents are often made with the expectation of applying reduced withholding tax (WHT) rates under Double Tax Treaties. However, Ukrainian tax authorities have recently taken a more restrictive and sophisticated approach to such transactions.
The main tool for challenging treaty benefits is a strict interpretation of “beneficial ownership”. Even if the recipient company formally meets treaty requirements (e.g., provides a certificate of tax residence), the tax authority may:
- Deny the reduced WHT rate,
- Claim that the company is not the actual beneficiary,
- Treat the payment as subject to the full 15% repatriation tax.
This scrutiny is especially common in multi-tiered corporate structures, where:
- The income recipient has no operational substance,
- The entity is merely a conduit or intermediary.
In a landmark ruling of April 17, 2025 (Case No. 160/18691/23), the Supreme Court upheld the tax authority’s refusal to apply the reduced treaty rate. The court ruled that:
- The non-resident failed to prove its beneficial ownership status,
- Formal documents were not sufficient – the court examined the actual corporate and financial relationships behind the structure.
This decision has set a new judicial standard in treaty benefit disputes and significantly raised the bar for compliance.
How to Challenge Tax Notices in Ukraine: Key Steps and Strategic Insights
Most tax audits in Ukraine end with tax notices imposing additional charges and penalties. However, in our experience at Ilyashev & Partners, a significant portion of such notices can be successfully challenged – either cancelled or reduced – if the taxpayer is well-prepared.
Two Ways to Appeal Tax Notices
- Administrative Appeal (before the State Tax Service)
This step is optional but often strategic. It allows companies to:
- Understand the legal position of the tax authority;
- Delay the enforcement of the charges;
- Build stronger arguments for a future court case.
Deadline: Must be submitted within 10 working days from receipt of the tax notice.
If not filed in time, the tax liability becomes agreed upon, and the company is considered to have tax debt.
- Judicial Appeal
If the administrative appeal is unsuccessful (or skipped), the company may file a claim with:
- District administrative court →
- Administrative Court of Appeal →
- Supreme Court (Cassation instance).
Deadline:
- 30 days after the decision on the administrative appeal, or
- 6 months from the date of the tax notice (if the administrative route was skipped).
Burden of Proof and Strategy
Although the formal burden of proof lies with the tax authority, in practice, the taxpayer must prove:
- The reality of transactions,
- The validity of expenses,
- The existence of proper documentation,
- The economic substance of the operations,
- The grounds for applying reduced WHT rates under international tax treaties.
A successful defense starts before the notice is issued – during the audit or even earlier. It involves:
- Strategic legal positioning,
- Comprehensive documentation,
- Skilled procedural support in court.
Case Snapshot
Ilyashev & Partners Law Firm successfully represented a Ukrainian hotel chain in a legal dispute with the State Tax Service of Ukraine and secured the cancellation of tax assessment notices. As part of its operations, the hotel chain holds wholesale and retail licenses for the sale of alcoholic beverages, stored in retail outlets and registered storage facilities. Among the charges brought against the hotel chain were storage in areas not intended for alcoholic beverages, production without a license, false reporting of their sale and purchase volumes, and storing without excise tax stamps. Ilyashev & Partners’ team collected evidence that the tax assessment notices were unlawful, the tax inspection results were biased, and were based solely on the assumptions made by the tax authority representatives. The appellate court agreed with the decision of the first-instance court and sided with the Ilyashev & Partners’ client.
Trends in Tax Litigation and Judicial Focus in Ukraine
Recent case experience of Ilyashev & Partners demonstrates a clear shift in Ukraine’s tax policy towards a risk-based approach. Tax authorities increasingly concentrate resources on cases with high fiscal impact, including:
- Structures involving non-resident entities,
- Transactional chains with potential signs of fictitiousness,
- High-volume import/export operations,
- Intra-group service arrangements.
Stronger Arguments and Analytical Tools
Tax audits and subsequent litigation have become more sophisticated and evidence-based. Authorities are applying analytical methods more systematically — especially in areas such as transfer pricing and tax risk profiling.
We observe growing emphasis on the economic substance of transactions and the genuine business purpose behind corporate structures or individual deals. Formal compliance is no longer sufficient without demonstrating a logical and commercially driven rationale.
International Standards Guiding Local Practice
Although Ukraine is not an OECD member and has only partially implemented BEPS recommendations, both the State Tax Service and Ukrainian courts increasingly refer to OECD and BEPS guidelines in tax disputes. These standards now inform judicial reasoning, particularly in cross-border and intra-group cases.
Implications for Cross-Border Businesses
Given this evolving environment, companies must:
- Reassess tax structuring strategies,
- Strengthen documentary evidence supporting each transaction,
- Involve experienced legal and tax advisors from the earliest stages of planning.
This is especially important for non-standard contracts, intercompany transactions, or cross-border deals that may attract regulatory scrutiny.
Practical Tax Recommendations for Multinational Businesses Operating in Ukraine
Drawing on the experience of Ilyashev & Partners and current practices of the Ukrainian tax authorities, we advise cross-border businesses to follow these key principles to minimize tax risks and avoid disputes:
- Assess Your Business Partners and Operational Structure
Conduct thorough due diligence on your counterparties and supply chains. This helps detect vulnerabilities such as:
- Suspicious or unverified suppliers;
- Non-transparent transactions;
- Lack of economic substance or questionable business models.
Identifying these risks early helps prevent tax reclassifications and accusations of fictitious operations.
- Use Transparent and Coherent Contractual Terms
Ensure that contracts are clearly drafted and consistent with the actual business operations. Logical and well-structured agreements reduce the risk of misinterpretation during tax audits.
- Prepare Transfer Pricing Documentation in Advance
Even without a formal request, companies should prepare transfer pricing documentation to justify their intra-group transactions.
This documentation is not only legally required, but also serves as a powerful defense during audits. Having it ready enables rapid and confident responses to tax authorities.
- Monitor PE and Beneficial Ownership Risk
Regularly assess the risk of being classified as a permanent establishment (PE) or beneficial owner in Ukraine. This is critical for groups that:
- Operate through local agents or teams,
- Engage in frequent transactions with Ukrainian counterparties,
- Use holding or intermediary entities.
Identifying potential PE or BO risks early helps avoid unexpected tax liabilities.
Proactive Compliance: A Strategic Priority
The Ukrainian tax authorities increasingly focus on economic substance and genuine business purpose behind transactions. Multinational groups must be prepared for deep-dive audits and formal inquiries.
To protect operations and ensure readiness:
- Conduct regular internal tax risk assessments,
- Review and update key contracts,
- Engage local legal counsel as soon as any tax inquiry arises.
A proactive, consistent, and well-documented approach is the most effective way to safeguard your business in Ukraine’s evolving tax landscape.
Ilyashev & Partners is one of the most experienced law firms in Ukraine in tax litigation, international tax structuring, and dispute resolution. Our team regularly advises multinational companies and financial institutions on complex tax audits, administrative and judicial appeals, and cross-border compliance strategies.
To learn more, please visit the Ilyashev & Partners Law Firm website or contact Ivan Maryniuk directly.