LEGAL ADVICE - Restriction on tax losses carry forward
We are happy to greet the readers on the pages of LVIV TODAY and announce the start of the new column – Legal advice. From now on, you will have a chance to read short comments on the most «burning» legal issues of business in Ukraine from an outstanding legal practitioner, a person to be often seen publicly as well as on the pages of LVIV TODAY and many other magazines - Mr. Markian Malskyy, Attorney-at-law of the year 2011, Partner and Head of West Ukrainian Branch of Arzinger. This pilot column is dedicated to one of the latest concerns of tax payers in Ukraine -
Restriction on tax losses carry forward
The story takes its beginning in early September 2011, when the State Tax Administration of Ukraine (STA) issued a clarification arguing that taxpayers are not allowed to include the losses incurred in 2010 and earlier into tax reports of the second quarter of 2011 and later. The STA invoked an ambiguous article of the transitional provisions of the Tax Code, which enacts the part of the Tax Code on corporate profit tax on April 1, 2011, unlike the rest of the Code, which had entered into force on January 1, 2011. As a result, the STA had assigned only one quarter (first quarter of 2011) for inclusion of the 80% of tax losses accumulated by January 1, 2011.
The right to carry tax losses forward is especially important for investors that have just entered the local market since their budgets take into account the first years of their businesses activities. The inability to carry the initial tax losses forward would mean that businesses are simply losing their certain rights, which are critically important for sustaining their operations and staying in the country’s market. In fact, the argumentation of the STA suggests that the business should renounce from these amounts to the benefit of the state, since in case the tax losses from the previous periods are carried forwards into 2012 and further periods, the state budget would lose UAH 7.0 billion.
Under these circumstances many businesses had nothing left but to have the decisions of the STA revoked by court decisions. Currently, the jurisprudence on tax losses carry forward is ambiguous – about half of the claims are denied, while in the remaining half of the decisions the courts took the side of the taxpayer. It looks, as if in the absence of the ruling of the Higher Administrative Court of Ukraine putting an end to the controversy, the outcome of such cases will remain uncertain, as in a lottery. However, recent trends are prevailing that the Higher Administrative Court will most certainly take the side of the taxpayers. Nevertheless, it is highly recommended to have a «clean record» (i.e. having all declared tax losses perfectly documented and substantiated) to stand upon their rights in courts, since the practice shows that the STA would win the cases where it manages to prove the sham character of the transactions and losses.
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