Lawful tax saving or evasion: where the line runs

"There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible… Nobody owes any public duty to pay more than the law demands." — Judge Learned Hand, dissenting in Commissioner v. Newman (USA, 1947)

"We are not accusing you of being illegal. We are accusing you of being immoral." — Margaret Hodge, Chair of the House of Commons Public Accounts Committee, to a Google executive (London, 2012)

Eighty years — and the entire distance modern tax practice has travelled — separate those two quotes. Both positions are still very much alive. This article is about how Ukrainian business should operate between them.

In the coming years the tax authority will less and less be chasing "envelopes" and more and more scrutinising the gap between the form of your business and its real substance. Better to check on which side of the line your structure stands before a tax inspector does it for you.

Key points

• Wanting to pay less tax is entirely lawful and natural. No one is obliged to structure their business so that the budget gets the maximum.
• Choosing any tax regime the law provides is "white" optimisation with no risk whatsoever.
• Every transaction and every legal entity in your structure must have an explanation that does not reduce to the word "taxes" (subclause 14.1.231 of the Tax Code of Ukraine).
• Do not rely on well-drafted rationales: courts test facts, not narratives.
• A private entrepreneur (FOP) who works only for you, with your equipment and on your schedule, is in an employment relationship — however you paper it over.
• Declared but not paid? That's financial penalties, not Article 212 of the Criminal Code. Concealed or understated — that is criminal risk.
• Close disputable issues with an individual tax ruling (arts. 52–53 of the Tax Code), not with the hope of not being noticed.

Is it lawful to want to pay less tax at all?

Yes. Article 67 of the Constitution of Ukraine obliges you to pay taxes in the manner and amount set by law — and not a word more. Article 19 adds: no one may be compelled to do what the law does not require, and the state acts only within its granted powers. In the space between the options the law allows, the taxpayer is free, and the tax authority has no competence to narrow that freedom.

This is not our opinion. The European Court of Human Rights in Shchokin v. Ukraine (2010) held it to be a violation of property rights that the tax authority, faced with ambiguous regulation, applied the interpretation less favourable to the taxpayer. The same principle is codified in subclause 4.1.4 of the Tax Code — the presumption of lawfulness of the taxpayer's decisions.

Does anyone expect a director to sit down with the CFO and figure out how to pay more? Of course not. Tax is a cost item for the owner, and reducing it within the law is as normal as negotiating rent. The problem does not start with the intent. It starts with the method.

From our practice. We have seen cases where the accountant of an exporter "just in case" charged 20% VAT on export operations. When the company then tried to reclaim VAT, it turned out that per the reporting there was no VAT to refund. There are countless cases where accountants fail to use provisions that would save money: they do not include input VAT from certain suppliers "just in case", or they understate real expenses "so as not to spoil relations with the tax authority".

What separates minimisation from evasion?

Look not at the result (the budget got less) but at the method. The law and case law distinguish three situations, not two.

Zone	What it looks like in practice	Legal basis	Consequences
Lawful optimisation	Choosing the tax system, single-tax rate, VAT status, using reliefs, planning the date of income recognition	Right of choice expressly granted by the Tax Code	None. Claims impossible either legally or morally
Requalification zone	Transactions and structures without independent economic substance: artificial splitting, "empty" intermediaries, services never rendered	Subclause 14.1.231 of the Tax Code (reasonable economic reason), the reality-of-transactions doctrine in Supreme Court practice	Additional assessments, 25–50% penalty under Art. 123 of the Tax Code, late-payment interest
Evasion	Understating income in the return, falsifying primary documents, "painted-in" expenses	Art. 212 of the Criminal Code where other elements are present	Criminal proceedings against officers plus all financial sanctions

The danger is not some hazy "grey zone" on the horizon, but the gap between what the documents say and what actually happens.

Important. Deliberate failure to pay declared amounts does not, by itself, constitute a crime under Art. 212 of the Criminal Code. Criminal risk arises where the object of taxation is concealed or understated, not where you honestly reported and could not pay. This is not a licence not to pay. It is a reason to understand where the criminal line actually runs.

What is business purpose, and how does a court test it?

Subclause 14.1.231 of the Tax Code requires an operation to have a reasonable economic reason — an effect that does not reduce to a tax saving. As you can see, the law does not prohibit saving. It prohibits making the saving the sole content of the operation.

The practical test for an owner fits into one question: if the tax burden were identical in all variants, would this legal entity, this contract, this intermediary still exist? If yes, the tax benefit becomes a lawful by-product of a normal business decision. If not, you are looking at a construction that a court will unwind no matter how well the paperwork is drafted.

The Supreme Court in its ruling of 28 February 2023 in case No. 160/13387/19 put it directly: what matters first and foremost is the economic effect created by the business operations, not the specifics of their formalisation; one must analyse the ultimate economic effect in the form of an actual increase (change in the value) of assets, regardless of defects in the primary documents. This cuts both ways: minor defects in paperwork do not kill a real operation, but flawless paperwork does not save an empty one.

Run every structural decision through this test before implementing it — and do not create legal entities or private entrepreneurs "just in case" for which you have no answer.

Splitting into private entrepreneurs (FOPs): when is it legal and when not?

Having several legal entities and private entrepreneurs in a group is not, itself, forbidden. The only question is whether each unit really lives its own life.

Lawful when the entrepreneur or separate company has its own clients, its own costs, its own equipment, real staff, and prices close to market. A separate business line with its own risks is not a scheme; it is structuring.

Risky when the "single-taxer" serves only your company, sits in your office, works your schedule, and yesterday was your salaried employee. The tax authority — and the court — will read that as employment.

From our practice. A transport company provided freight services to Ukrainian and foreign partners. But it did not receive payment for the transport into its own account — customers paid Ukrainian intermediaries, private entrepreneurs, for freight-forwarding services. During the audit it turned out that these entrepreneurs were listed on the company's website as its employees. There were other markers of artificiality too. The tax authority treated it as an unlawful minimisation scheme.

"We'll write up the justification in advance"? No, that will not work

A common idea is to bake a nice business rationale into the scheme from the outset — memos, minutes, business plans — and then the business-purpose doctrine is powerless.

Wrong. A narrative is words. A court tests facts: who actually did the work, whose equipment, where the money went in circles, whether the company can exist without you. A real business generates coordinated traces every day on its own: bank transactions, counterparties' reports, correspondence, employee testimony. A fabricated construction has to be coordinated by hand, and it snaps at the first inconsistency you don't control.

Worse still: on the criminal side, a pre-cooked pack of "rationales" for a substantively empty construction becomes evidence of direct intent. A spontaneous mistake can be explained by negligence — a premeditated legend is much harder to explain away.

What does international practice show?

The intent to pay less has never harmed anyone whose form matched substance.

Amazon definitively won its case against the European Commission before the Court of Justice of the EU in December 2023 over its Luxembourg royalty structure (case C-457/21 P): the court held that the structure fit within the then-applicable transfer-pricing rules — even though no one hid the tax motive. TV presenter Gary Lineker in 2023 defeated a GBP 4.9 million claim from HMRC — the court looked at the actual relationships, not at the desire to save.

The mirror example is Apple: in September 2024 the CJEU definitively ordered EUR 13 billion to be recovered, because there the form and the substance of the Irish structure diverged.

The losers are not those who wanted to pay less. The losers are those whose "painted" version parted ways with reality.

Does a business owe more than the law demands?

The short answer is no. And it has been tested experimentally. In 2017 the government of Norway — a country with arguably the world's highest tax morale — set up an official mechanism for voluntarily paying extra tax for anyone who felt they were paying too little. In the first half-year, Norwegians topped up the budget by the equivalent of about USD 1,300. For the whole country.

The constitutions of the Scandinavian states say the same thing as ours: Denmark (§ 43) and Norway (§ 75) allow taxation only on the basis of a law adopted by parliament. No legal order recognises an obligation to "give more".

But Margaret Hodge's quote at the top is not rhetoric — it is a working pressure mechanism. After the 2012–2013 scandals Starbucks voluntarily paid the UK budget GBP 20 million it did not legally owe, to stop a consumer boycott. A whole infrastructure grew around this: EU country-by-country reporting, the GRI 207 standard, Fair Tax Mark certification. The law remained the ceiling and floor of legal obligation, but for a business working with Western partners, tenders and ESG reporting, a second filter was added.

We recommend that such companies supplement the business-purpose test with a publicity test: "would we be comfortable if this scheme appeared in our annual report?". For Ukrainian business on the road to the EU, automatic exchange of information will make the structure visible whether you want it to be or not.

How to check your structure today

Sort each of your tax positions into three baskets:

• White zone. A direct option granted by law: tax system, single-tax rate, reliefs. Take them, always — not using them is plain managerial negligence.
• Defensible position. There is a business purpose, there are documents, there is Supreme Court practice in your favour. Take it deliberately, with a reserve for a possible dispute.
• Artificial construction. Works only until someone looks. This is what turns a tax dispute into a criminal one.

Close disputable issues by obtaining an individual tax ruling under Art. 52 of the Tax Code. If you act on it, you are released from liability under Art. 53 of the Tax Code — even if the ruling is later revoked. And do not accept offers to "close the question" in any other way — those are exactly what turns a tax dispute into a criminal one.

From our practice. A company that, as an intermediary, promoted and sold tickets for public events was including significant Google-ads spend on other companies' events in its expenses. After sending a request to the tax authority for an individual tax ruling, the company removed the risk of audits and additional assessments.

Frequently asked questions

Can we be penalised simply for choosing the simplified system instead of the general one? No. The choice of tax system is a direct right of the taxpayer under the Tax Code. A claim is possible only where turnover is artificially split between controlled parties to preserve access to the simplified system.

We declared the taxes but do not have the money to pay. Is that criminal? Non-payment of declared amounts, by itself, does not amount to a crime under Art. 212 of the Criminal Code, but financial sanctions and interest apply. Criminal risk arises when the object of taxation is concealed or understated.

Our contractor entrepreneur used to be our employee. Is that a problem? It is a marker of heightened attention on audit, but not a verdict. What decides it is the substance: own clients, own equipment, no schedule and no subordination. If those are missing, there is a risk of requalification into employment with additional assessments.

Will a well-drafted contract and a business rationale protect us? Only if there is real substance behind them. Documents that diverge from the facts do not protect. In a criminal case, a pre-fabricated "legend" for an empty operation works against you — as evidence of intent.

Make sure every link of your structure has an answer to the question "why do you exist". And that the answer does not reduce to the word "taxes".

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This material is informational and analytical in nature and is not an individual tax or legal opinion. The provisions, case law and examples cited are current as at the date of publication; specific decisions should be taken with regard to the circumstances of your structure and with professional support.