Business purpose in transactions with non-residents: how exporters and importers can fight back against tax assessments

Ukrainian tax authorities increasingly disallow expenses on your transactions with non-residents and increase your financial result, citing the absence of a business purpose. In many cases the audit report rests on the inspector's assumption rather than on evidence. You have the right to challenge this, and Supreme Court practice mostly sides with the taxpayer who prepared the justification in advance.

Key points in 30 seconds

• Prepare the business-purpose justification before the audit, not during it.
• The burden of proving the absence of a business purpose lies with the tax authority, not with you (Arts. 140.5.4 and 140.5.6 of the Tax Code, applied through Art. 39).
• A loss-making transaction is not the same as a transaction without business purpose (Supreme Court ruling in case No. 818/6203/13-а).
• Economic effect is not only profit. It also covers preservation of assets and their value (Art. 14.1.231 of the Tax Code).
• The effect may occur in the future. Immediate return is not required.
• Keep primary documents, calculations and business correspondence that show your intent at the time of the transaction.
• Do not accept an inspector's verbal offers to "close the issue". Insist on written requests listing the documents required.

What business purpose is and where it sits in the Tax Code

The Tax Code defines a reasonable economic reason (business purpose) as a reason for which the taxpayer intends to obtain an economic effect as a result of business activity (Art. 14.1.231). The second paragraph adds that economic effect implies growth or preservation of the taxpayer's assets and/or their value, as well as creating conditions for such growth in the future.

In other words, the law requires not a guaranteed profit but a reasonable intention to obtain one at the moment you entered into the deal.

The definition itself has been in the Code for a long time, but three laws gave it teeth: No. 466-IX of 16 January 2020 (effective from 23 May 2020), No. 786-IX of 14 July 2020 and No. 1117-IX of 17 December 2020 (main changes from 1 January 2022). Since these amendments, business purpose applies primarily to transactions with non-residents under Art. 39 and para. 140.5 of the Tax Code. The Ministry of Finance confirmed this in the generalised tax consultation approved by order No. 11 of 13 January 2022.

Here is how para. 140.5 hits cross-border operations specifically.

Tax Code provision	Transactions covered	Effect on financial result	Who proves the absence of business purpose
Art. 140.5.4	purchases from non-residents on CMU lists No. 1045 and No. 480	increases by 30% of value; with no business purpose disallows the entire expense	tax authority, applying Art. 39
Art. 140.5.5-1	sales to non-residents on CMU lists No. 1045 and No. 480	increases by 30% of value	tax authority, applying Art. 39
Art. 140.5.6	royalties paid to listed non-residents	disallows the full royalty amount where there is no business purpose	tax authority, applying Art. 39
Art. 140.5.21	controlled transactions rejected by the authority for lack of business purpose	increases the financial result based on Art. 39 analysis	tax authority
Art. 39	controlled transactions (transfer pricing)	price adjustment to market level	tax authority

For an owner running cross-border operations, business purpose is not a textbook abstraction but a specific assessed amount in the audit report.

Who must prove the absence of business purpose, you or the tax authority?

Do you have to justify yourself first? Under Arts. 140.5.4 and 140.5.6 of the Tax Code, the obligation to prove circumstances showing the absence of a business purpose rests with the controlling authority, applying Art. 39. So until the tax authority produces evidence rather than assumptions, your expenses remain lawful.

In practice inspectors build the report on formal indicators: a counterparty in a "low-tax" jurisdiction, a below-market price, a chain of intermediaries. Courts do not always accept such arguments. In its ruling of 17 August 2022 in case No. 640/4237/19, the Supreme Court reiterated that the income-generating aim as a feature of business activity is directly linked to the presence of a business purpose in each transaction, and that substance rather than form must be assessed.

Case from practice

A Ukrainian company paid a non-resident for access to a CRM system. Before the purchase the company suffered from poor order tracking, periodic client losses, misunderstandings with customers and loss of relationship history for former clients whose data was kept in Excel. An internal memo and an analytical conclusion by the sales department, prepared before the purchase, projected revenue growth of 5% per year over several years thanks to better customer interaction. That was far more than the system cost. During the following year's audit the tax authority questioned the necessity of the payment. At the objections stage the expenses were successfully defended on the basis of the prior justification and the fact that the effect was not immediate but would materialise over several years.

The transaction turned out to be loss-making. Does that destroy business purpose?

No. The loss on an individual transaction does not in itself prove the absence of a business purpose. Selling goods at a loss can result from objective reasons: falling market prices, the risk of spoilage, an exchange-rate swing on imports or exports. The Supreme Court confirmed this in case No. 818/6203/13-а on 5 November 2019, stating that the economic effect does not necessarily occur immediately and, for objective reasons, may not occur at all.

There is a counterexample too. In case No. 2а-0870/1161/11 of 21 January 2020 the court did not support a taxpayer who systematically sold aluminium products at prices that did not cover production costs and generated significant losses for years. The difference between the two cases is one thing: whether the taxpayer could explain the business reason for the loss.

Record the reason for the loss in writing at the moment of the transaction (an internal memo, a calculation, a counterparty letter on changed terms) rather than hoping to explain everything after the fact in court.

What counts as economic effect: only profit, or also preservation of assets?

Profit is only half the answer. The law expressly refers to growth or preservation of assets or their value. This means a transaction that protected your assets from loss has a business purpose just as much as one that generated income.

The baseline conclusion came in Supreme Court case No. 804/6788/14 of 23 April 2019: the concept of business purpose implies that a transaction must, at least theoretically and if its objectives are achieved, allow for growth or preservation of assets or their value. The court repeated this formula in cases No. 120/15979/21-а of 4 April 2023 and No. 300/1565/19 of 27 May 2022.

So if your transaction with a non-resident protected working capital, hedged currency risk or preserved the value of an asset, that is a full-fledged business purpose, not a "loss-making scheme".

Case from practice

A grain-trading company signed a cross-border contract to supply a non-resident with a batch of grain that had not yet been grown. A year later the cost of production exceeded the contract price. The company nevertheless decided to deliver, based on two factors: 1) preserving its business reputation and relationship with a major buyer; 2) avoiding contractual penalties, which in a negative scenario could have caused greater losses than selling the batch below cost.

What if the effect arrives later rather than now?

The law also protects a deferred result. The wording "creating conditions for such growth in the future" in Art. 14.1.231 means a transaction may bring no immediate return yet still create the preconditions for one.

The Supreme Court recognised this directly. In case No. 812/9439/13-а the court supported seemingly loss-making transactions of an oil-refining company because the costs were connected with ongoing business processes, noting that the effect may arise in the future. In case No. 140/1962/19 of 17 June 2022 the court applied the same logic to exchange-rate differences on asset transactions.

Preparatory, infrastructure and growth-oriented investments therefore have a business purpose if you show a reasonable link between the transaction and the future effect.

"One of the main purposes is non-payment of tax." What if it is not the main one?

This is the most delicate point of the whole concept. Under Art. 14.1.231 a transaction with a non-resident has no business purpose if its main purpose, or one of its main purposes, is non-payment of tax or reduction of taxable profit. The wording follows the principal purpose test from the BEPS Action Plan and the Multilateral Convention (MLI).

The logic of the test is strict on the taxpayer. It is enough for the tax benefit to be one of the main purposes, and the presence of a legitimate commercial goal alongside it does not save you. But there is protection in reverse: a purely incidental, ancillary tax benefit does not trigger the test. The line between "one of the main" and "incidental" is drawn by a materiality assessment: would you have carried out the transaction in this form at all without the tax motive?

There is no settled, textbook Supreme Court answer yet to the question "what if a tax purpose exists but is not the main one". Practice under this test is still forming, since it applies to transactions after 23 May 2020.

Important

A business-purpose justification works only if it existed at the time of the transaction, not if it was written on the eve of the trial. The court assesses your intent based on documents from that period. Retroactively "drawing in" a business purpose is almost impossible, and the tax authority takes advantage of that.