Tax Audits of the Debtor in Bankruptcy Proceedings and Their Consequences

The Code of Ukraine on Bankruptcy Procedures (CUBP) entered into force on October 21, 2019.

In accordance with Part 2 of the Final and Transitional Provisions of the CUBP, from the date of entry into force of this Code, the Law of Ukraine “On the Restoration of the Debtor’s Solvency or Recognition of Bankruptcy” (as subsequently amended) and the Resolution of the Verkhovna Rada of Ukraine “On the Entry into Force of the Law of Ukraine on Bankruptcy” ceased to be effective.

Part 4 of the Final and Transitional Provisions establishes that from the date of entry into force of this Code, the further examination of bankruptcy cases shall be carried out in accordance with the provisions of this Code, regardless of the date on which the bankruptcy proceedings were opened, with the exception of bankruptcy cases that, on the date of entry into force of this Code, are at the stage of rehabilitation proceedings, which shall continue to be conducted in accordance with the Law of Ukraine “On the Restoration of the Debtor’s Solvency or Recognition of Bankruptcy.” The transition to the next judicial procedure and the further conduct of such cases shall be carried out in accordance with this Code.

Pursuant to Part 1 of Article 2 of the CUBP, proceedings in bankruptcy cases are governed by this Code, the Commercial Procedural Code of Ukraine, and other laws of Ukraine.

However, with the entry into force of the CUBP, a number of issues remained unresolved and require legislative regulation.

In particular, I would like to draw attention to one of the pressing issues that arises in bankruptcy proceedings.

In practice, there are recurring instances where tax authorities conduct audits of the debtor at the stage of the liquidation procedure, on the basis of the provisions of the Tax Code of Ukraine (TCU).

As provided for in subparagraph 78.1.7 of paragraph 78.1 of Article 78 of the TCU, one of the grounds for conducting an unscheduled documentary audit is that a reorganization procedure of a legal entity (other than a transformation) has been initiated in respect of a taxpayer, or the termination of a legal entity or the business activities of an individual entrepreneur, the closure of a permanent establishment or a separate subdivision of a legal entity, including a foreign company or organization, has commenced, or bankruptcy proceedings have been initiated against the taxpayer, or an application for deregistration of the taxpayer has been submitted.

However, having analyzed the provisions of Article 59 of the CUBP, it can be concluded that from the date on which the commercial court issues a ruling recognizing the debtor as bankrupt and opening the liquidation procedure, the bankrupt incurs no additional obligations whatsoever, including obligations to pay taxes and duties (mandatory payments), other than costs directly related to the conduct of the liquidation procedure. The accrual of penalties (fines, late payment charges), interest, and other economic sanctions on all types of the bankrupt’s indebtedness shall cease.

At the same time, neither the provisions of the CUBP nor those of the TCU define the stage of bankruptcy at which the tax authority must conduct an audit of the debtor, which in turn does not prohibit the tax authority from conducting an audit after the debtor has been recognized as bankrupt.

The Supreme Court reached the same legal conclusion in its ruling of July 22, 2020, in case No. 904/4681/19: the norms of the applicable tax legislation and bankruptcy legislation do not contain a prohibition on the tax authority conducting an audit of the debtor after the latter has been recognized as bankrupt.

From the aforementioned norms, it follows that after the commercial court issues a ruling recognizing the debtor as bankrupt, the bankrupt incurs no obligations whatsoever. It is therefore logical that the supervisory authority may conduct an audit specifically during the asset management and/or debtor rehabilitation procedures, since it is only within these procedures that conducting a tax audit and determining monetary obligations is effective and genuinely aimed at preventing violations of tax legislation.

Taking the foregoing into account, and given that the conduct of an audit by the tax authority during the liquidation procedure of a bankrupt creates no consequences for the debtor, the question arises as to what purpose a tax audit serves at the liquidation stage.

In my view, this issue requires regulation at the legislative level, in order to prevent the abuse of authority by tax authorities in conducting audits of the debtor, and also to avoid placing additional pressure on the debtor.