A bulletproof argument: how group IV single tax payers can attract financial assistance without loosing their special status

According to the State Fiscal Service (SFS) of Ukraine, if an enterprise receives such assistance, the share of agricultural commodity production may not correspond to the value defined for Group IV single tax payers by the TCU. Therefore, they say, our dear farmers should seek personal tax advice, so that experts could interpret the legislative provisions in their favour. However, in fact, one can easily do without this advice. It will be sufficient to ensure the correct wording of contractual provisions.

What is the essence of the issue, if an agricultural producer, being a Group IV single tax payer, receives funding in the form of the repayable financial assistance?

Article 292.11 of the TCU stipulates that the amounts of financial assistance provided on a repayment basis, received, and returned within 12 calendar months from the date of its receipt shall not be included in the income determined in this Article. That is, if the single tax payer does not return the amount of the received repayable financial assistance within 12 calendar months, this amount will be included in their income and subject to taxation.

Given the potential long-term character of financing the agricultural businesses that, a priori, will not be able to return the amounts provided under agreements on repayable financial assistance within 12 calendar months, there is a risk that these amounts will be regarded as income and, therefore, the requirement for 75% of income from agricultural commodity production will not be met and the agricultural enterprise may lose the status of Group IV single tax payer.

At the same time, we should note that Article 292 of the TCU with Clause 292.11 is called “Procedure for income determination and its composition for single tax payers of Groups 1-3”.

Group IV single tax payers have their special Article 292-1, which defines the basis and object of taxation for such type of business. Unlike single tax payers of Groups 1-3, who withhold and pay single tax on income from their activities, for Group IV single tax payers, the object of taxation is the area of agricultural lands and/or water resource lands owned by the agricultural producer or provided to them for use, including under lease, and the tax basis is the normative-monetary
assessment of such a land plot.

Another argument that an agricultural producer can use in his/her favour is the form of tax declaration for payers of Group IV of the simplified system of taxation. This form does not contain categories of data on payer’s income from any of their activities.

The declaration shall contain only information about the availability of land plots, their area and category, location and state registration, normative-monetary assessment, as well as the rate and the amount of the accrued/paid single tax and other information that is not related to the income received by the payer.

Thus, the TCU provides for a separate procedure for collecting single tax for Group IV payers, for whom the recognition of any income will matter only in the accounting process and will not be taken into account in the tax accounting of the single tax on the basis of Clause 292.1 of Article 292 of the TCU of Ukraine.

As regards the possibility of losing the status of Group IV single tax payer because of the receipt of repayable financial assistance, there are also not too many grounds for concern. The most important thing worth attention is the due date for returning the amount of financial assistance.

To calculate the share of agricultural commodity production, commodity producers are guided by the accounting data, according to which the repayable financial assistance is not an income and, therefore, cannot influence the definition of the enterprise status of Group IV single tax payers. Similar position is expressed by the representatives of the regulatory authority, for example, in the Letter of the SFS Main Department in the Kharkiv oblast No. 781/10/20-40-15-03-14 of February 11, 2016.

At the same time, in such agreements the parties often fail to specify the due date for returning of funds and confine themselves to the general phrase: “the return of funds shall be conducted in the manner prescribed by the law”. Also, given that such agreements are concluded between related parties, the parties may forget to extend the due date of the repayable financial assistance and consider that until the claim is not lodged, it is not necessary to return the money.

Such a situation is also very risky, as based on Article 14.1.257 of the TCU (the amount of debt was not charged by the end of the limitation period) such repayable financial assistance may be reclassified as non-repayable and will be included in the single tax payer’s income. In this case, the payer risks losing the status of Group IV single tax payer for violating the requirement for 75% of income from agricultural commodity production.

In its consultations (the Letter of the SFS Main Department in the Kharkiv oblast No. 781/10/20-40-15-03-14 of February 11, 2016 and the Letter of the SFS Main
Department in the Zakarpattia oblast No. 2876 of December 16, 2016), the SFS notes that the amount of the repayable financial assistance that was not returned by the
expiration of the period specified in the agreement influences the share of agricultural commodity production and is included in the income of the Group IV
single tax payer.

Although the expiration of the period specified in the agreement does not guarantee the impossibility of compulsory recovery of debt from the payer, in order to
avoid potential disputes with the regulatory authority, we recommend to indicating a clear due date for the repayment of the amount of financial assistance in the interest-free loan agreements and extending this due date by concluding supplementary agreements, so as to avoid delays in returning such assistance to the lender.

In the course of inspections, nothing prevents the tax inspectorate from including the amount of the repayable financial assistance that was not returned within 12 months in the income of the agricultural commodity producer. In this case, we propose using the above arguments in your defence, as well as keep in mind the norm of Clause 56.21 of Article 56 of the TCU. This norm states that in the event the rules of the TCU are contrary to each other and allow for ambiguous (multiple) interpretation of the rights and duties of taxpayers or regulatory authorities, leading to possibility to take a decision in favour of the taxpayer as well as in favour of the regulatory authority, the decision is to be taken in favour of the taxpayer.