Reduction of the risks of business transactions being recognized as fictitious: practical advice considering the current legal positions of the Supreme Court

In practice, proving the reality of business transactions is one of the most common subjects of disputes between taxpayers and tax authorities, as it directly affects the ability to claim a tax credit, as well as expenses considered when determining the object of taxation for corporate income tax.

This article examines practical tips for taxpayers to help reduce the risk of business transactions being recognized as fictitious (unreal), taking into account the current judicial practice of the Supreme Court (hereinafter — the SC).

Proper completion of primary documents

Primary documents are a fundamental component of confirming the reality of business transactions, and significant deficiencies in their completion will directly affect the legal assessment of transactions by tax authorities and courts.

As SC practice shows, the systemic nature of defects in primary documents is a sign that usually indicates the unreality of business transactions. Thus, in the resolution dated May 5, 2023, in case No. 1340/5998/18, the SC noted that individual formal defects in the completion of primary documents cannot be the sole basis for concluding the absence of the business transaction. However, given that in the analyzed case, all expenditure invoices provided by the taxpayer failed to specify the positions of the persons responsible for carrying out the business transaction and the correctness of its execution (which is a mandatory detail of a primary document), the SC concluded that such a defect is of a systemic nature and, in combination with other circumstances in the case, objectively casts doubt on the accuracy of the information in the expenditure invoices regarding the business transaction recorded therein. A similar approach was adopted in the resolution dated April 28, 2025, in case No. 240/15137/20, in which the SC, taking into account the systemic defects in the primary documents, concluded that the business transactions were fictitious.

Therefore, it is necessary to comply with the requirements for the proper completion of primary documents and ensure that all their details are entered correctly.

Nevertheless, the formal existence of primary documents (even if they are drawn up in accordance with the requirements of the law) does not guarantee that transactions will be recognized as real and cannot serve as a basis for the formation of tax accounting data if there is no actual movement of assets. A similar position was expressed by the SC in its resolution dated May 2, 2025, in case No. 640/12674/19.

The availability of other documents, which, in accordance with normal business practice, accompany the actual performance of certain types of transactions

The assessment of the reality of business transactions is not limited to examining primary documents alone.

The SC emphasizes that, to prove the actual performance of transactions, in certain cases, the presence of other documentation that usually accompanies such transactions (certificates, statements, etc.) may also be necessary.

Specific transactions with objectively determined characteristics attract particular attention from tax authorities and courts in this context. For example, in the resolution dated May 14, 2025, in case No. 440/3111/19, the SC concluded that transactions for the purchase of fuel and petroleum products have specific features and require the presence of an appropriate material and technical base and supporting documents (in particular, quality certificates or laboratory tests). In the absence of such documents and given the systematic defects in primary documents, the SC concluded that the reality of the business transactions was not confirmed. A similar approach was applied in the resolution dated May 5, 2023, in case No. 160/15514/20, in which the SC, evaluating the reality of business transactions for the supply of sunflower grains, considered the absence of documents confirming the products’ quality. Even though such documents are not primary, under the applicable State Standards of Ukraine, they must accompany transactions of this type. In view of this, their absence was regarded as one of the circumstances indicating the unreality of the respective transactions.

Thus, to confirm the reality of business transactions, it is advisable to assemble a complete set of documents demonstrating their actual performance, rather than limiting it to primary documents alone. This is especially relevant for business transactions that are of a special nature.

Economic effect of the completed business transactions

Another factor that may be considered when evaluating a particular transaction is its impact on the financial status of the parties involved. In its resolution dated July 31, 2024, in case No. 420/17165/21, the SC stated that the intention to obtain an economic effect means that a business transaction, at least in theory (provided that the set objectives are achieved), must provide for the possibility of an increase or preservation of assets or their value.

If a particular transaction is not driven by reasonable economic reasons, such transactions are not considered to be carried out within the scope of economic activity and, therefore, their consequences are not subject to reflection in tax accounting.

This means that, in terms of the economic substance of business transactions, taxpayers must be prepared to prove, in particular, that they intended to achieve a certain economic effect (even if the transaction turned out to be unprofitable).

Counterparty verification

Another circumstance often considered by the tax authority as a basis for doubting the reality of business transactions is negative information about the counterparty, its failure to fulfill tax obligations, etc. Thus, in the resolution dated May 28, 2025, in case No. 240/10407/24, the SC noted that the bad faith of counterparties in the supply chain cannot be an indisputable basis for considering business transactions to be fictitious. However, in their entirety and in combination with other circumstances established in each specific case, such a circumstance may cast reasonable doubt on the reality of the respective transactions.

Given the SC’s approach, it is important for taxpayers to conduct a comprehensive verification of available information about the counterparty before the start of cooperation.

Conducting such a verification will confirm compliance with the principle of due diligence in choosing a counterparty, adherence to which is emphasized by the SC (resolution dated March 28, 2024, in case No. 120/7614/22, resolution dated May 5, 2023, in case No. 160/15514/20, and others). This, in turn, also grounds for applying the principle of individual taxpayer responsibility and for preventing the imposition of negative tax consequences on them solely due to violations committed by the counterparty.

Among other things, during audits of taxpayers, tax authorities also pay significant attention to the material and labor resources of their counterparties — whether they are sufficient for the performance of the relevant business transaction.

Judicial practice on this issue is settled and proceeds from the fact that the absence of a counterparty’s own material or labor resources cannot, by itself, indicate the unreality of business transactions. In particular, in the resolution dated June 5, 2025, in case No. 160/4145/23, the SC stated that the lack of material and labor resources of counterparties does not preclude the possibility of actually performing a business transaction, since it is possible to engage employees under civil law contracts, outsourcing, and outstaffing (staff leasing). Also, fixed assets and vehicles may be held by the counterparty on a rental or leasing basis.

It should be noted that it is advisable for taxpayers to assess in advance whether the counterparty can fulfill the contract terms on its own and, if it involves third-party material and labor resources, to ensure that there is proper documentary evidence of such involvement.

Furthermore, attention in this context should be paid directly to the wording of the specific terms of the contract to be concluded with the counterparty. For example, in the resolution dated May 5, 2023, in case No. 160/15514/20, the SC concluded that the correctness of the conclusion regarding the unreality of business transactions in the analyzed situation was confirmed, among other things, by the circumstance established during the trial that the taxpayer’s counterparty lacked land plots of sufficient area (for instance, by right of ownership, lease, etc.) for the independent cultivation of sunflowers, whereas under the terms of the contract, this counterparty undertook to supply the taxpayer with sunflower grains of its own production, which under such circumstances was practically impossible. In this situation, in particular, the counterparty could not have fulfilled its contractual obligations by purchasing grain from another producer, as this would have contradicted the terms of the contract.

Summarizing the above, the reality of business transactions is determined by a comprehensive assessment of a range of factors and circumstances surrounding the transactions, rather than on individual formal characteristics. Among other things, the following is important:

• the actual movement of assets;
• documentary evidence of the transactions in the form of a set of primary and other documents that usually accompany transactions of a certain type;
• the focus of the transactions is on achieving an economic effect;
• the taxpayer’s compliance with the principle of due diligence in selecting a counterparty;
• the counterparty’s real ability to fulfill its contractual obligations (independently or by involving third-party resources).

The availability of appropriate evidence in this regard will form the evidentiary basis for the taxpayer should a dispute regarding the fictitious nature of the transactions arise.