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Author: Oleksandr Fedoryshyn, Managing Partner at F&P

Adjustment of the customs value of goods is a common practice among customs authorities, which can significantly affect the tax liabilities of importers. Determining the customs value is a key element in the customs clearance process, as the amount of customs duties, excise taxes, and value-added taxes depend on this indicator.

In many cases, customs authorities recognize the declared value of goods as understated and make adjustments, leading to increased payments. However, such decisions are not always justified. Therefore, entities engaged in foreign economic activity find it necessary to challenge them.

In this article, we will examine the legal aspects of customs value adjustment, the grounds for its appeal, and the mechanisms for protecting the interests of importers.

The customs value of goods imported into Ukraine is determined in accordance with the provisions of the Customs Code of Ukraine and international agreements ratified by Ukraine.

The primary method for determining customs value is the contract price method; however, customs authorities may apply alternative methods if:

• The submitted documents contain discrepancies or conflicting data;
• there is no reliable confirmation of the transaction price;
• The declared value significantly differs from the market value of similar goods;
• A connection has been established between the seller and the buyer, which could have influenced the price of the product.

If customs authorities believe that the declared value of the goods does not correspond to the actual value, they have the right to adjust it. This leads to an increase in customs duties, which is a basis for a dispute between the importer and the customs authority.

In our practice, we recommend appealing decisions on the adjustment of customs value of goods in court, as this significantly increases the importer’s chances of obtaining a positive result.

The analysis of judicial practice that has developed over the past few years allows for the identification of several specific grounds on the basis of which courts annul decisions on the adjustment of the customs value of goods.

I. Unjustified demand for additional documents by customs

The Customs Code provides for three grounds for requesting additional documents from a declarant:

1. the presence of discrepancies in the documents;
2. the presence of signs of document forgery;
3. the absence in the documents of all information confirming the numerical values of the components of the customs value of the goods, or information regarding the price that was actually paid or is payable for these goods.

Exclusively conclusions based on the examination of documents attached to the customs declaration may be the basis for requesting additional documents.

At the same time, customs authorities often do not provide any confirmed information about discrepancies and deficiencies in the documents submitted by the declarant in their decisions on the adjustment of customs value, nor do they provide information about specific facts or circumstances established during customs clearance, which, when assessed collectively, led the customs authority to decide that the first method for determining the customs value of the goods imported by the plaintiff could not be applied.

Indeed, customs authorities have the right to control the accuracy of the customs value calculated by the declarant, but these powers are exercised in a manner defined by law. In particular, the request for additional documents to confirm the declared customs value may only occur in the presence of reasonable doubts about the accuracy of the information provided by the declarant. Such doubts may arise from the incompleteness of the submitted documents to confirm the declared customs value of the goods, discrepancies between the characteristics of the goods specified in the submitted documents and the customs inspection of these goods, the comparison of the level of the declared customs value of the goods with the level of the customs value of identical or similar goods for which customs clearance has already been completed, and so on.

The presence of reasonable doubts regarding the accuracy of the declared customs value of goods is an imperative condition, as the law associates this circumstance with the possibility of requesting additional documents from the declarant and grants the customs authority the right to take subsequent actions aimed at determining the actual customs value of the goods. Such doubts are justified if the documents provided by the declarant contain discrepancies, signs of forgery, or do not contain all the information confirming the numerical values of the components of the customs value of the goods, or information regarding the price that was actually paid or is to be paid for these goods. In this regard, the customs authority is obliged to specify the specific circumstances that caused the respective doubts, the reasons for the impossibility of verifying them based on the documents provided by the declarant, as well as to justify the necessity of verifying the doubtful information and indicate the documents whose provision can eliminate doubts about the reliability of this information.

That is, the customs authority is obliged to provide the declarant with a comprehensive list of documents regarding which there are doubts, as well as a list of documents that must be provided to resolve such doubts. Failure to comply with these requirements may be grounds for canceling the decision on the adjustment of the customs value of goods.

II. Failure to specify in the adjustment decision the detailed information about the product to the level of its value to which the adjustment is made

The Supreme Court has established a consistent judicial practice according to which a formally lower level of customs value of the goods imported by the plaintiff compared to the customs value of other customs clearances cannot be considered as an undervaluation of the customs value by the plaintiff and does not constitute an obstacle to the application of the first method of determining the customs value of the goods, nor can it be a sufficient and independent basis for refusing to carry out the customs clearance of the goods according to the first method of determining their customs value.

The decision to adjust the customs value of goods cannot be based solely on information from the UAIS, as the procedure for its formation, maintenance, and obtaining information, as well as the procedure for using its data by economic entities during their foreign economic activities, is not provided for by the Customs Code of Ukraine. It should also be taken into account that the UAIS lacks information on the adjustment of the declared customs value of goods, as well as information on court decisions regarding the determination of the customs value of goods and the methods for its determination, which means that such an information base does not contain all objective data on goods imported into Ukraine, which are documented and subject to calculation.

At the same time, if the customs authority nevertheless decides to adjust the customs value of goods, such decision, in addition to referring to the number and date of the declaration under which the same/similar goods were imported, must contain information on: the country of origin of such goods, the basis of delivery, the procedure applied, the quantity and value of the goods, the supplier and the country of shipment.

A number of resolutions of the Supreme Court have established the practice that if the decision on adjustment of the customs value contains only references to the numbers and dates of customs declarations used by the customs authority as a source of information when adjusting the customs value of the disputed goods, without explanations of the adjustments made to the volume of the consignment of identical or similar goods, delivery terms, commercial terms, it indicates the unlawful nature of the disputed decision on adjustment of the customs value of the goods.

Thus, the failure to provide detailed information on the terms of delivery of the goods to which the adjustment was made is an independent ground for cancellation of the decision on adjustment of the customs value of goods.

It is worth emphasising that it is important to follow the following recommendations when conducting import operations:

• 1) Documentary confirmation of the customs value: a full package of documents (contracts, invoices, payment orders) should be provided.
• 2) Preliminary verification: check the value of similar goods using open sources (customs statistics, stock exchange quotes).
• 3) Legal support: in case of adjustments to the customs value, engage customs brokers and lawyers to prepare a reasonable position.
• 4) Timely appeal: comply with the statutory appeal deadlines in order not to lose the opportunity to protect your rights.

Appealing against a decision to adjust the customs value of goods is an effective way to protect the rights of importers. It is important to properly substantiate your position and provide proper evidence of the real customs value. The main thing to remember is that an appeal requires a clear legal strategy and timely response, which can be provided by the specialists of FEDORYSHYN&PARTNERS.

Author: Maryna Pokotylo, Partner at F&P

Reputation is more than just a set of characteristics. For a financial institution, it is the foundation of trust, the basis of relationships with clients, partners, and investors.

Current legislation in Ukraine provides provisions that allow the National Bank of Ukraine (hereinafter referred to as the NBU), as the regulator of the relevant market, to recognize an individual’s business reputation as unsatisfactory. Such recognition is based on documented information about a natural or legal person, which allows for a conclusion to be made about the compliance of their activities with the requirements of legislation, business practices, and professional ethics, as well as information about the professional and managerial abilities of the individual.

The detection of signs of an imperfect business reputation is carried out in the following cases:

1. Independent verification by a financial institution of the compliance of its executives with the qualification requirements regarding business reputation and professional suitability.
2. Assessments of business reputation by the National Bank:

1) if the applicant submits a package of documents for obtaining a license for the type of financial services activity, a license for conducting currency transactions in terms of trading in currency values in cash;

2) in the event of approval/notification of the acquisition or increase of substantial participation in a non-banking financial institution (excluding credit unions), a postal operator authorized to engage in currency trading activities;

3) in the event of approval for the position of manager, key person of the united credit union, significant credit union, and insurer (candidates for these positions);

4) throughout the entire term of the license of a non-banking financial institution for the type of activity of providing financial services;

5) in the case of accreditation / registration / licensing of a branch of a non-resident insurer, a branch of a foreign institution in Ukraine;

6) in the event of a request for the appointment of a proxy who is granted the right to participate in the voting.

When assessing business reputation, the National Bank identifies the following criteria as signs of an imperfect business reputation:

1.  A conviction for economic, selfish, or official crimes, if it is not expunged, which includes:

• The imposition of sanctions on an individual by Ukraine or other countries (except aggressors), international organizations.
• Inclusion of an individual in terrorist or sanctions lists.
• Prohibition from holding certain positions by court decision.
• Providing false information to the National Bank.
• Failure to fulfill personal financial obligations to the National Bank.
• Citizenship or tax residency in the aggressor country.
• Ownership or management of companies subject to international sanctions.

2. Providing false information, including cases where an individual or their representatives submitted documents with false data to the National Bank that could have influenced the regulator’s decision, is considered a violation.
3. Violation of financial obligations, namely:

• Non-payment of taxes or fees in significant amounts.
• Significant debts to banks or other creditors.
• Declaration of a person as bankrupt.

4. Functioning of payment systems.

A person is considered to have an impeccable business reputation if they:

• Managed or owned a significant share in the payment system that was shut down due to violations.
• I was the head of such a company for over six months before its closure.
• Had real control over the activities of the payment system, which threatened the security of Ukraine.

5. Violations of anti-corruption and financial legislation, which include cases where individuals have received a court ruling for corrupt actions or violations of financial monitoring, their reputation is considered unsatisfactory for three years.
6. Professional activity:

• Dismissal from work for gross misconduct, corruption, or abuse.
• Appointment to a managerial position without the approval of the National Bank.
• Deprivation of the right to engage in advocacy, notarial, or arbitration activities.
• Disciplinary sanctions in the civil service, law enforcement agencies, or the judicial system.

7. Ownership or management of financial institutions:

• Ownership of a share or management of an institution before its bankruptcy or license revocation.
• Work in managerial positions at the institution during the year before its liquidation.
• The possibility to influence the institution’s decisions before its bankruptcy.
• Dismissal due to the requirement of the National Bank or due to violations of financial legislation.

If an individual or legal entity has signs of an impeccable business reputation, they can submit a request to the National Bank for their non-application. To do this, it is necessary to explain the reasons for the emergence of such signs and provide appropriate evidence confirming the absence of violations.

The petition must contain a reasoned position of the person and may also be supplemented by documents that support their arguments. Individuals may also submit assurances of their good business reputation.

During the consideration of the application, the National Bank analyzes the submitted documents and information from official sources. Based on the results of the review, it can make one of two decisions:

1) To recognize a person’s business reputation as unsatisfactory (if the provided information is insufficient or unsubstantiated).

2) Remove the mark of impeccable business reputation (if the request is supported by appropriate evidence).

When making a decision, the National Bank also considers whether the individual could have influenced the situation that led to a negative assessment of their reputation and analyzes the presence or absence of a causal link between their actions and the financial problems of the institution.

If the National Bank denied the request, a reconsideration is possible no earlier than one year after the decision is made.

Thus, the rehabilitation of business reputation is an important tool for restoring trust in financial institutions and their leaders. In cases where the National Bank detects signs of questionable business reputation, individuals are given the opportunity to appeal this decision by submitting a petition with appropriate evidence. This process requires detailed justification, documentary confirmation, and compliance with regulatory requirements. Therefore, legal support plays a crucial role at every stage. The team of specialists at FEDORYSHYN & PARTNERS is ready to provide you with professional legal assistance, from document preparation to comprehensive analysis and protection of individuals’ interests in the matter at hand.

 

Author: Anastasia Holovatyuk, Lawyer at F&P

Non-compete clauses are provisions in a contract (agreement) under which an employee agrees not to work for the competitors of their employer, nor to engage in any activities that compete or may compete with the activities of the employer for a certain period of time, in a certain territory, or in certain positions. In most European countries and in the USA, the use of non-compete clauses / non-competing agreements is quite a common practice. Yes, recently the state of California (USA) has been increasingly attracting employees, particularly IT specialists. Employers promote the conclusion of non-compete agreements, as such transactions have become an effective tool for preventing employees from engaging in competitive activities. However, California law has changed in the context of invalidating contractual provisions that prevent a person from engaging in a lawful profession, trade, or business. The cancellation of non-compete agreements is interpreted as the invalidation of any non-compete agreements in the context of employment or any non-compete clause in a contract, including an employment contract. Therefore, any agreement that restricts the entrepreneurial activity or profession of any person is invalid, except under certain circumstances:

• The sale of a business, under which non-compete agreements may be valid if they are part of the business sale agreement or its assets.
• confidential information, when the restrictions may pertain to the protection of confidential information or trade secrets.

However, in Ukraine, the practice of applying non-competition clauses is just gaining popularity. For the first time at the legislative level, a non-compete agreement was enshrined in the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine,” which regulates the activities of Diya City Residents. This has given new meaning to the conclusion of such agreements in the IT sector, as the legislator has clearly defined the possibility of their conclusion, established key conditions, and provided for the consequences of violating the requirements regarding the content and form of the agreement. The specified law defines that the essential terms of such a contract are:

• the term of the obligation, which shall terminate no later than 12 months from the date of termination of employment, civil, or economic relations between the specialist and the Diia City resident;
• the territory to which the obligation applies;
• an exhaustive list of activities considered to be competing activities, and/or individuals engaged in competing activities;
• material goods that the specialist receives in return for the obligation to refrain from engaging in competitive activities.

The contract may provide for obligations to refrain from such actions:

• conclusion of employment contracts, gig contracts, or other civil law or commercial law contracts with other persons engaged in activities similar to those of such a Diia City resident (competing activities);
• engaging in competing activities as an individual entrepreneur;
• ownership directly or indirectly of a share in another legal entity that engages in competing activities;
• holding the position of a member of the governing body of another legal entity that engages in competing activities, etc.

It should be noted that failure to comply with the requirement for agreeing on essential terms when concluding such a contract renders it null and void. There is a diverse practice regarding the application of such agreements, considering the long-term development of similar regulations. Usually, when addressing this issue, attention should be paid to the following conditions for the operation of non-compete provisions:

• the circle of individuals to whom the non-compete provision may apply (usually this pertains to employee-employer relationships);
• written provision in the employment contract or the conclusion of a separate non-compete agreement;
• the person engaging in activities similar to those of the company;
• the presence of a restriction regarding a specific territory, which should not exceed the territory where the company is usually located;
• the duration of such provisions should be within a reasonable timeframe (as mentioned in Ukraine, no more than 12 months);
• the procedure for establishing a breach of a non-compete agreement and liability for it.

It is important to note that for violating the non-compete clause, the employee will have to reimburse the employer for the provided compensation and pay an additional amount equivalent to that compensation. Undoubtedly, the non-compete clause should be based on one of the fundamental principles of labor law—the invalidity of conditions that worsen the position of employees, as well as the coercion of an employee to enter into agreements without mutual consent. In summary, we would like to note that non-compete clauses are an effective tool for protecting businesses from unfair competition by former employees; however, their application must comply with legislative requirements. In Ukraine, the legal regulation of such agreements is still being developed, and to date, they are only established in the IT sector, specifically for residents of Diya City. The law firm Fedoryshyn & Partners can assist with drafting non-compete agreements, develop individual terms considering the specifics of the business, and provide legal consultation on the application of non-compete terms in a specific case.

Author: Aliona Yevtushenko, lawyer at F&P

The Law of Ukraine 3813-IX dated 18.06.2024 amended the Tax Code of Ukraine with subparagraph 69.41, which stipulates that during the period of martial law in Ukraine and until December 31 of the year in which martial law is terminated or canceled, special features of tax, fee, and payment administration are established for taxpayers with a high level of voluntary compliance with tax legislation, as determined by the controlling bodies specified in subparagraph 41.1.1 of paragraph 41.1 of Article 41 of the Tax Code of Ukraine (tax administration), as defined by this subparagraph.

In turn, on November 11, 2024, the Procedure for the Formation and Publication of the List of Taxpayers with a High Level of Voluntary Compliance with Tax Legislation, approved by the Order of the Ministry of Finance of Ukraine No. 495 dated October 7, 2024, registered with the Ministry of Justice of Ukraine under No. 1539/42884 dated October 14, 2024 (hereinafter referred to as the Procedure), came into force.

According to the Procedure, the List of taxpayers with a high level of voluntary compliance with tax legislation (hereinafter referred to as the List of taxpayers) is formed based on the tax reporting of the taxpayer submitted to the controlling authority within the deadlines established by the Tax Code of Ukraine, tax information from the information and communication systems of the State Tax Service, and other sources obtained in the manner and method defined by the Code.

The State Tax Service ensures the formation and approval of the List of Payers no later than the last working day of March, May, August, and November.

To determine the compliance of taxpayers with the criteria of taxpayers with a high level of voluntary compliance with tax legislation, the following data is taken into account:

1) tax reporting and amendments to it, submitted as of the calculation date:

– in March – for the previous reporting (tax) year;

– in May – for the first quarter of the current year and the second to fourth quarters of the preceding year;

– in August – for the I-II quarters of the current year and the III-IV quarters of the preceding year;

– in November – for the I-III quarters of the current year and the IV quarter of the preceding year.

2) paid amounts of tax, fee, and payment revenues.

Taxpayers with a high level of voluntary compliance with tax legislation include legal entities and individual entrepreneurs who simultaneously meet all of the following requirements:

1) The tax debt and/or arrears on other payments, the collection of which is entrusted to the controlling authorities, does not exceed 3000 non-taxable minimum incomes of citizens and no more than 30 days have passed since their occurrence.

2) absence of arrears in the payment of the single contribution to mandatory state social insurance.

3) compliance with the criteria defined in subparagraph 69.41.2 of subparagraph 69.41 of subparagraph 69 of section 10 of chapter XX “Transitional Provisions” of the Tax Code of Ukraine, depending on the chosen taxation system.

4) the absence of facts of violation by the taxpayer of tax obligations regarding the submission of reports and/or documents (notifications), including those provided for in Articles 39 and 39^-2 of Section I, paragraph 46.2 of Article 46 of Chapter 2 of Section II of the Tax Code of Ukraine.

To determine the compliance of a taxpayer with this requirement, information regarding the absence of tax notification decisions in the form “PS,” issued for violations of the taxpayer’s obligations to submit reports and/or documents (notifications), including those provided for in Articles 39 and 39^-2 of Section I, paragraph 46.2 of Article 46 of Chapter 2 of Section II of the Code for the last 12 months preceding the month of approval of the List of taxpayers, is used.

5) the absence of tax notifications-decisions issued to the taxpayer regarding violations of the deadlines for settlements on export and/or import operations over the past consecutive 12 months;

6) the absence of a decision on the compliance of the taxpayer with the risk criteria for value-added tax, made in accordance with the Procedure for suspending the registration of tax invoices / adjustment calculations in the Unified Register of Tax Invoices, approved by the Resolution of the Cabinet of Ministers of Ukraine dated December 11, 2019, No. 1165;

7) the absence of initiated procedures for the termination of a legal entity or the business activities of an individual entrepreneur;

8) absence of initiated bankruptcy proceedings (insolvency) against the taxpayer;

9) the absence of a decision regarding the taxpayer and/or its founders (participants), ultimate beneficial owners on the application of special economic and other restrictive measures (sanctions) in the manner prescribed by the Law of Ukraine “On Sanctions”;

10) the absence of the taxpayer and/or its founders (participants), ultimate beneficial owners being citizens of a state that is conducting armed aggression against Ukraine (except for citizens of such a state who have been granted the status of combatants after April 14, 2014);

11) the absence among the founders (participants), ultimate beneficial owners of the taxpayer of persons whose place of residence (location) is a state that is conducting armed aggression against Ukraine.

Therefore, as can be seen from the above, the taxpayer’s verification is carried out by the tax authority independently using electronic registers, in accordance with the Procedure. In turn, the taxpayer is not involved in any way in the process of verifying compliance with the criteria for taxpayers with a high level of voluntary compliance with tax legislation.

The list of taxpayers is published by the State Tax Service (STS) on its official website. The STS notifies the taxpayer about their inclusion/exclusion from the list of taxpayers by sending an informational message through the taxpayer’s electronic cabinet within 5 working days after the approval of the list of taxpayers in accordance with the relevant forms and procedures established by the Ministry of Finance (clause 2 of section VI of the Procedure).

Additionally, we inform you that the State Tax Service does not publish information about a taxpayer in the Register of Taxpayers if the taxpayer submits a refusal to disclose their data within 5 working days after receiving an informational notification from the State Tax Service about their inclusion in the Register of Taxpayers.

 

Features of tax administration for individuals included in the Register of taxpayers:

1) by the regulatory authorities are not initiated:

• actual inspections regarding the licensing of fuel storage activities exclusively for the purposes of personal consumption and/or industrial processing;

documentary unscheduled inspections, except for inspections:

• conducted exclusively at the request of the taxpayer;
• conducted on the grounds specified in subparagraphs 78.1.1 and 78.1.2 regarding transfer pricing control, 78.1.3, 78.1.5, 78.1.7, 78.1.8, 78.1.9, 78.1.12, 78.1.14, 78.1.15, 78.1.16, 78.1.19, 78.1.21, and 78.1.22 of paragraph 78.1 of Article 78 of the Tax Code of Ukraine;
• taxpayers for whom tax information has been received indicating violations of foreign exchange legislation by the taxpayer in terms of compliance with the deadlines for the arrival of goods in import operations and/or foreign exchange earnings in export operations;
• taxpayers engaged in the production and/or sale of excise goods, the organization and conduct of gambling activities in Ukraine (gambling business), taxpayers providing financial and payment services;
• documentary planned inspections, except for inspections of taxpayers engaged in the production and/or sale of excise goods, the organization and conduct of gambling activities in Ukraine (gambling business), and taxpayers providing financial and payment services;

2) The period for conducting desk and documentary audits of the taxpayer, as specified in subparagraphs 200.10 and 200.11 of Article 200 of this Code, is 5 and 10 working days, respectively. The provisions of this subparagraph apply to applications for the refund of the budgetary value-added tax compensation submitted by the taxpayer during the period of the taxpayer’s inclusion in the List of Taxpayers with a High Level of Voluntary Compliance with Tax Legislation;

3) Individual tax consultations are provided to the taxpayer exclusively by the central executive body implementing state tax policy within 15 calendar days following the day of receipt of the request, without the possibility of extending the review period. In case the territorial body of the central executive body implementing state tax policy receives the request mentioned in this paragraph, it is obliged to send it to the central executive body implementing state tax policy within the next working day after receiving such a request;

4) assignment of an official from the territorial body of the central executive authority responsible for implementing state tax policy to interact with the taxpayer (compliance manager);

5) the taxpayer’s receipt, upon request, within five days of information held by the controlling authority that may indicate tax risks in the activities of such a taxpayer, as well as consultations on mitigating such risks.

As of today, it is impossible to assess the effectiveness of the introduced features of tax administration for taxpayers with a high level of voluntary compliance with tax legislation. The main reason is the lack of established cases that would illustrate the practical application of these measures and their implementation in terms of tax compliance.

The success of the implemented institution will depend on the practical effectiveness of mechanisms such as automated compliance checks for taxpayers, provision of tax consultations, reduction in the number of audits, and the introduction of a compliance manager. Several clients of the law firm FEDORYSHYN & PARTNERS have expressed interest in implementing such an initiative; however, further observation and analysis are necessary for well-founded conclusions and recommendations.

Author: Olena Andriyko, lawyer at F&P

The Republic of Cyprus has long remained one of the most popular jurisdictions for foreign investment due to its favorable tax regime and advantageous provisions in bilateral double taxation avoidance agreements.

In this article, we will examine the key aspects of dividend payments to non-residents from the Republic of Cyprus and the possibilities of applying a reduced withholding tax rate on repatriated income.

What does the legislation say?

The Tax Code of Ukraine defines that income sourced in Ukraine includes any income received on the territory of Ukraine by residents or non-residents. This can include income from activities, interest, dividends, royalties, and other investment income paid by Ukrainian residents or representatives of foreign companies.

Dividends are considered both classical payments to founders from profits and any payments by legal entities to their participants in connection with the distribution of net profit.

When Ukrainian companies or branches of foreign companies pay income to non-residents, they must withhold tax at a rate of 15%. This tax is paid at the time of income payment, unless otherwise stipulated by international treaties of Ukraine with the country of residence of the income recipient.

On November 8, 2012, a Convention on the Avoidance of Double Taxation was signed between Ukraine and the Republic of Cyprus, ratified by the Law of Ukraine. According to Article 10 of the Convention, dividends paid by a company resident in one state to a resident of another state may be taxed in the country of the recipient. They may also be taxed in the state of the payer, but at a reduced rate: 5% if the beneficial owner of the dividends holds at least 20% of the company’s capital or has invested no less than 100,000 euros, and 15% in other cases.

Thus, de jure, the legislation stipulates that the payment of dividends to a resident of the Republic of Cyprus can be made at a reduced rate of 5%.

At the same time, in practice, everything is not so straightforward.

Ukrainian tax authorities, during audits of resident enterprises, often conclude that non-residents are conducting activities on the territory of Ukraine without registering a permanent establishment. In such cases, tax authorities assess additional liabilities, asserting that the resident taxpayer must withhold 15% of the income tax paid to the non-resident.

Permanent Representation: Legal Basis

According to Article 5 of the Double Taxation Conventions, a permanent establishment is a place of business through which a non-resident’s business is carried on in whole or in part. Such places include:

• office, branch, factory, warehouse;
• mine, quarry, facility for extracting natural resources;
• any other place where entrepreneurial activities are carried out.

At the same time, activities that are purely preparatory or auxiliary in nature do not create a permanent establishment. Such activities include:

• storage or display of goods;
• gathering information;
• procurement of goods or other auxiliary functions.

The main activity that generates profit and constitutes an important part of the business is considered as the activity of a permanent establishment. In contrast, auxiliary activities only perform a supportive function and do not create obligations for registration.

According to the OECD Model Convention recommendations, the decisive criterion is whether the activity at a specific location is substantial for the enterprise. Therefore, to distinguish between core activities and preparatory or auxiliary activities, it is necessary to keep in mind that:

• preparatory or auxiliary activities were carried out for the benefit of the foreign company itself, and not at the expense of third parties;
• the main activity is usually perceived as the activity that is essential and important based on the content of the organization’s commercial goals and objectives;
• preparatory activities precede the commencement of the main activities of a non-resident in the territory of Ukraine;
• Auxiliary activities ensure the process of conducting the main economic activities by a non-resident, are carried out simultaneously with the main activities, but are not considered part of the main activities.

For enterprises, it is important to clearly distinguish between core and auxiliary activities. In the event of an audit, it should be confirmed that the activities of a non-resident do not create a permanent establishment. If the activities are auxiliary in nature, this should be documented to avoid the risk of tax reassessment.

Therefore, determining the status of a non-resident’s activities is crucial for the correct application of tax regulations and avoiding double taxation.

What do tax officials pay attention to?

The main arguments used by regulatory bodies can be summarized in the following theses:

• the main activity of the representative office is identical to the activity of the non-resident (parent company) as defined in the statutory documents of the non-resident.
• the nature of the non-resident’s activities indicates that the sole purpose of registering the company is to distribute dividends.
• the funds transferred to the non-resident are “transit” funds and, within a short period after being credited to the account, are transferred to the accounts of third parties;
• authorized and/or trusted persons of a non-resident are citizens of Ukraine who reside permanently in Ukraine, carry out activities here, receive payments, etc.;
• the analysis of the decisions/protocols of the non-resident indicates that such decisions were signed by persons under powers of attorney who are citizens of Ukraine and are directly or indirectly related to the resident;
• the presence of corporate dependence of a non-resident on another non-resident legal entity controlled by a citizen of Ukraine;
• conclusion of contracts or signing any documents on behalf of such a non-resident dividend recipient by the actual beneficiary (individual);
• absence of employees and substance in the non-resident;
• the actual (real) management of a non-resident and a resident by the same individuals (group of individuals);
• the payment of dividends in non-cash form, in particular through further reinvestments;
• the acquisition of a share from the charter capital of a resident company by a non-resident was carried out by a third non-resident party;
• conclusion of contracts by officials or related parties of a non-resident / signing documents as representatives of a non-resident;
• the absence of any other source of income for the non-resident, except for dividends from the resident;
• absence of evidence of any economic activity by the non-resident;
• do non-residents have any obligations regarding the further transfer of the received income to another non-resident;
• a non-resident is restricted in the right to independently determine the further economic fate of the specified income;
• a non-resident does not have the authority to determine the further economic fate of such income, that is, they are not the beneficial (actual) recipient of the income;
• the “technical” nature of the activities of non-resident companies
• the presence of only one certificate confirming residency status is not a basis for applying a reduced rate.
• the resident is a related party to the non-resident (considering the common beneficiaries), and the activities carried out by the representatives of the non-resident in Ukraine cannot be considered auxiliary;
• the founders of the non-resident / KBV are citizens of Ukraine;
• non-resident directors do not receive a salary;
• the non-resident does not have personnel, the functions of the company are performed by its directors and secretary. In fact, the functions are carried out on the territory of Ukraine – in terms of the acquisition and sale of corporate rights and the management of corporate rights;
• the type of activity of the non-resident is investment management and financing. The company’s assets consist exclusively of investments in legal entities established under the laws of Ukraine.
• all income of a non-resident is income sourced from Ukraine;
• all contracts for the acquisition and sale of corporate rights were concluded in Ukraine.

How to avoid additional charges?

To avoid receiving additional assessments from the tax authority or to increase the chances of successfully contesting such assessments, specialists from FEDORYSHYN & PARTNERS recommend ensuring the following conditions of the non-resident’s activities before transferring dividends:

1) the presence of other income for a non-resident, apart from dividends from residents of Ukraine;

2) the presence of substance, employees, real wage payments;

3) analyze the signatories of documents on behalf of the non-resident – whether they are connected to the resident;

4) ensure that funds received from a resident are not transferred from a non-resident’s account for at least 6 months;

5) ensure that a non-resident engages in activities that are not similar to those of a resident.

The implementation of the mentioned points does not guarantee the avoidance of additional assessments by tax authorities, but it provides a real chance of obtaining a positive court decision when appealing such assessments.

Author: Oleksandr Fedoryshyn, Managing Partner at F&P

In 2024, the National Anti-Corruption Agency resumed full audits of declarations by declarants, which had been suspended since February 22, 2022.

First of all, it should be noted that during full audits, the NACP began using the “declaration risk rating indicator” – a numerical indicator of the degree of identified discrepancies (risks) in the declaration, which consists of the sum of the weighted coefficients of discrepancies (risks), calculated by the software of the Unified State Register of Declarations of Persons Authorized to Perform Functions of the State or Local Self-Government (hereinafter referred to as the Register) based on the results of logical and arithmetic control.

Logical and arithmetic control is carried out by the system (LAC software) of the NACP, which automatically checks the information specified in the declaration for compliance with the information displayed in the register. The more errors the system finds, the higher the declaration of the declarant will rank for a full audit. Therefore, to minimize risks, it is advisable to use the reference formed in the Register for filling out the declaration. Let’s analyze several risks that are often found in the subjects of declaration during full inspections.

1. Open enforcement proceedings.

Having many years of experience in accompanying the process of full verification of declarations of declarants and protecting their interests in court and pre-trial proceedings, we can conclude that obtaining a conclusion from the NACP about the establishment of false information is almost 100% if the declarant did not provide information about an open enforcement proceeding, regardless of the status of the declarant in such enforcement proceeding (debtor or creditor).

In such a case, in order to prevent a person from being held liable due to excessive formalism, it is extremely important to prove the absence of an offense by the declarant.

Such a case became the first victory for the law firm Fedorishin and Partners in 2025, as on January 2, our company’s lawyers successfully defended the interests of a client in court, who was accused of committing a corrupt administrative offense due to the failure to provide information about an open enforcement proceeding.

2. Information about the payment of fines for traffic rule violations.

If it has already happened that the National Agency has started a full verification of the declaration of the declarant, it should be taken into account that, in addition to data from: the Unified State Demographic Register, the State Register of Property Rights to Real Estate, the State Register of Civil Status Acts of Citizens, the Unified State Register, the State Land Cadastre, the Unified State Register of Vehicles, the State Ship Register of Ukraine, the Unified Register of Powers of Attorney, the Inheritance Register, etc., the NACP can gain access to the information and communication system “Information Portal of the National Police of Ukraine” (hereinafter – the IPNP system).

From the IPNP system, the NACP can obtain information about the payment of fines for traffic rule violations and information about traffic rule violations recorded automatically.

Yes, in the case of a declarant paying a fine for violating traffic rules on a vehicle that does not belong to them, several times during the reporting period, the NACP may conclude that the declarant used the vehicle.

3. Information obtained during the special verification.

Although, a special verification is conducted for candidates for certain positions and is carried out to ensure the incompatibility of corrupt practices and public service and, as a result, the exclusion from positions of individuals who have assets not confirmed by legal income, who have submitted false documents for appointment, cooperate with the enemy, etc. That is, the special verification has a preventive function to prevent corruption risks.

However, the NACP uses information obtained during the special verification of the declarant to conduct a full verification of the declaration. Thus, if certain information is established during the special verification and is not reflected in the annual declaration (for example, property that is owned and/or used, termination of rights to objects, etc.), the National Agency may conclude that false information has been established during the full verification of the declaration.

4. Property and assets abroad.

It is impossible to overlook the international cooperation of the National Agency, which it reports on its official resources. Yes, during a full verification of a declaration, the NACP can receive information from foreign bodies engaged in financial monitoring. In this regard, the National Agency can obtain information from international systems, such as the Egmont Group, which contains financial intelligence information from various countries.

At the same time, the NACP is expanding cooperation with international anti-corruption organizations, particularly GRECO and FATF. Such activities of the anti-corruption agency make it possible to obtain information about the property and assets of the declarant outside of Ukraine during a full verification of the declaration.

5. Monitoring of lifestyle.

Additionally, the National Agency uses the results of lifestyle monitoring (LSM) during inspections.

LSM is carried out based on information obtained from individuals and legal entities, as well as from media and other open sources of information. A large amount of information may be used to obtain information about the declarant within the framework of conducting LSM, including from surveillance cameras, social media posts, hotel visits, and other places.

For reference, it is worth noting that the Procedure for the Implementation of Asset Declarations by Declarants currently complies with the requirements of the regulatory legal act, as it has been registered with the Ministry of Justice of Ukraine.

Yes, during the implementation of the LSM, the National Agency may, in particular, but not exclusively:

• Check the movement of vehicles and their location with other vehicles and individuals;
• Fix the systematic residence of the declarant at the address. For example, the declarant did not declare a person with whom they lived for 183 days or more during the reporting period. In turn, the NACP has confirmation from surveillance cameras placed as part of the implementation of the “Safe City” project or placed by other entities that the declarant systematically visited a certain address and stayed there for some time, for example, overnight. Establishing that the person with whom the declarant interacts resides at that address, the National Agency may conclude that the declarant concealed a person with whom they have shared responsibilities, shared household, and have mutual rights and obligations, and did not declare such a person during the reporting period. In this case, the NACP will apply paragraph b) part 1 article 1 of the Law of Ukraine “On Prevention of Corruption” (any persons who live together, are connected by a common household, have mutual rights and obligations with the subject specified in part one of article 3 of this Law (except for persons whose mutual rights and obligations do not have a family nature), including persons who live together but are not married).
• A similar method for documenting the joint presence of the declarant with another person within the framework of conducting an LSM can include the fixation of mobile devices in the same area, photos on social networks and location tags, purchased tickets for the same period in one direction, tickets purchased by one person for the benefit of another, crossing the border for entry and exit by individuals in the same or very close time period, the use of property by another person belonging to the declarant or their family members, etc.

In summary, we would like to note that since the second half of 2024, the NACP has significantly strengthened the processes of verifying declaration subjects, which is undoubtedly an important step in ensuring transparency and preventing corruption. However, a thorough verification of declarations requires declaration subjects to pay careful attention to filling out documents to avoid potential violations. In particular, it is important to consider information about open enforcement proceedings, payment of fines, property abroad, and other aspects.

Author: Uliana Luchkevych, lawyer at F&P

Managing accounts payable is a key element of the financial stability of any enterprise. For effective accounting and risk minimization, it is important to understand the criteria for recognizing debt as uncollectible.

A client approached the specialists at FEDORYSHYN&PARTNERS with a request to provide a legal assessment of the possibility of classifying an advance received from a counterparty as a bad debt, considering that more than 3 years have passed since the funds were received and any contact with the counterparty has been lost.

According to paragraph 5 of P(S)BO 11 “Liabilities”, a liability is recognized if its value can be reliably determined and there is a probability of a decrease in future economic benefits due to its settlement. If, as of the balance sheet date, a previously recognized liability is not to be settled, its amount is included in the income of the reporting period.

Thus, in the event that circumstances arise on the balance sheet date indicating that a previously recognized liability is not to be settled, the corresponding amounts should be recognized as income for the relevant reporting period.

Therefore, the key question that arises in this case is the possibility of classifying the received advance payment as bad debt and, accordingly, recognizing such funds as income.

To determine whether the obligation is subject to repayment, it is necessary to refer to the legislative interpretation of the concept of bad debt, which is contained in subparagraph 14.1.11 of paragraph 14.1 of Article 14 of the Tax Code of Ukraine. In particular, according to the specified norm, a debt is considered bad if the statute of limitations has expired.

At first glance, it seems that the advance received by the client can be classified as bad debt, as more than 3 years have passed since it was transferred. However, such a conclusion would be premature.

Due to the implementation of quarantine in Ukraine, and subsequently, martial law, points 12 and 19 were added to the Final and Transitional Provisions of the Civil Code of Ukraine, which provide for the suspension of the statute of limitations.

Thus, if as of March 12, 2020 (the date the quarantine was introduced), the statute of limitations for the return of the advance payment had not expired, the counterparty has the right to go to court to recover the paid funds, and therefore classifying such funds as bad debt is premature.

It is worth noting that the contract concluded by the client with the counterparty provided for the application of Ukrainian legislation to its provisions, which, as we have already mentioned, effectively suspended the statute of limitations during the period of martial law.

At the same time, in the event that the contract concluded with the counterparty stipulates the application of another substantive law to the relations, under which the statute of limitations has expired, the payment received from the counterparty may be classified as bad debt.

It should be noted that the expiration of the statute of limitations for debt recovery is not the only reason for classifying a debt as uncollectible. In case you have doubts about the possibility of classifying the debt as uncollectible, the specialists at FEDORYSHYN&PARTNERS will offer a detailed analysis of the relationships that have arisen with the counterparty and provide a detailed roadmap for your further actions.

Author: Maryna Pokotylo, Partner at F&P

Double taxation is the simultaneous imposition of tax obligations on the same income or property of an individual or legal entity in different states. That is, if a person is a tax resident of both Ukraine and Canada, they are obliged to pay taxes to the budgets of both countries. It is clear that such a situation creates a significant financial burden, so entrepreneurs wish to avoid double taxation. It is possible that the absence of double taxation reduces the number of tax disputes related to the determination of residency, double interpretation of tax objects, and so on.

The key element in this matter is the determination of tax residency. It is residency that defines where and how an individual should declare their income. In this publication, we will examine, through an example, how tax residency is determined, what documents are needed to confirm it, and how to use international agreements to protect your financial interests.

A Canadian citizen, who emigrated from Ukraine back in 2020, approached the law firm Fedoryshyn and Partners. The main request of the client was to avoid double taxation.

To resolve this issue, it is necessary to determine tax residency.

Tax residency is the status of an individual that determines in which country they must pay taxes on their entire income. According to Canadian tax legislation, the presence of Canadian tax residency status must be comprehensively confirmed with documentary evidence of the following facts:

• registered permanent residence in Canada;
• permanent residence of family members in Canada;
• employment relations with a Canadian employer;
• rental (purchase) of real estate in Canada;
• teaching children in school or in preschool;
• opening accounts in Canadian banks, etc.

In addition, it is necessary to understand international legislation, as a number of countries have entered into international agreements to avoid double taxation. Currently, there are 71 international bilateral conventions (agreements) on the avoidance of double taxation in effect between Ukraine and other states (the current list is available on the website of the Ministry of Finance of Ukraine).

In particular, according to paragraph 2 of Article 4 of the Convention on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital between Ukraine and Canada, if an individual is a resident of both Contracting States, their status is determined as follows:

• (a) she is considered a resident only of the State where she has a permanent home. If she has a permanent home in both States, she is considered a resident only of the State with which she has the closest personal and economic ties (center of vital interests);
• (b) if the State in which she has her center of vital interests cannot be determined or when she does not have a permanent home available to her in any of the States, she shall be considered a resident only of the State in which she has a habitual abode;
• (c) if she usually resides in both States or when she usually does not reside in either of them, she is considered a resident only of the State of which she is a citizen;
• (d) if she is a citizen of both States or if she is not a citizen of either of them, the competent authorities of the Contracting States shall resolve the issue by mutual agreement.

It should be noted that the application of Ukraine’s international treaty regarding tax exemption or the application of a reduced tax rate is allowed only on the condition that the non-resident provides the person (tax agent) with a document confirming their tax resident status – a certificate. From this, it follows that the client needs to obtain a certificate from the Canadian employer and the Canada Revenue Agency, which, in turn, must be legalized and translated at the Embassy of Ukraine in Canada.

Additionally, it is possible to obtain documentary confirmation of the absence of primary activities in Ukraine:

• Certificate form OK-5 “Individual Information about the Insured Person.” It contains data on the amount of earnings for the appointment and calculation (recalculation) of pension amounts, as well as for the accrual of sick leave, social benefits (including the minimum wage supplement), and insurance experience. It can be obtained through “Diia” or the website of the Pension Fund of Ukraine.
• Certificate form OK-7 “Individual Information about the Insured Person.” Contains information about the actual amounts of wages from which the unified social contribution is paid (within the maximum limit) and the insurance period. It can be obtained through “Diya” or the website of the Pension Fund of Ukraine.
• Certificate from the State Register of Individuals – Taxpayers about the sources/amounts of accrued income, withheld and paid tax, and military levy. It can be obtained through “Diia” or the taxpayer’s electronic cabinet.

Separate attention should be paid to financial transactions.

Since Ukraine joined the Multilateral Agreement on Automatic Exchange of Financial Account Information (hereinafter referred to as the Multilateral Agreement) in the summer of 2022, a regular exchange of various financial information regarding individuals and legal entities between countries should be expected (personal data, information about foreign bank accounts, account balances and amounts, account inflows, etc.). The first exchange of tax information took place in the 4th quarter of 2024, which extended to 50 foreign jurisdictions.

Considering that at the time of contacting our law firm, the client was a resident of both Canada and Ukraine, we recommended that she engage in consultations with the bank to agree on the possibility of submitting information about her tax residency status, for which she should provide her Canadian passport and tax returns. However, this does not necessarily exempt her from the obligation to provide information about her tax residency status in Ukraine, as the mentioned Multilateral Agreement requires banks to obtain information about all countries where an individual is a tax resident.

It is important to understand that failing to provide the bank with information about assets and income may lead to the blocking of transactions at the bank or other sanctions. Meanwhile, providing such information will allow tax authorities to obtain the necessary data in accordance with the Multilateral Agreement.

In addition, in legal practice, banking institutions may take into account the legal conclusions of a Ukrainian lawyer, which will outline the position regarding the absence of signs of tax residency in Ukraine under the given circumstances. The same applies to the involvement of a Canadian lawyer, who can prepare a report explaining the specifics of Canadian tax legislation.

Therefore, to avoid double taxation, it is necessary to thoroughly familiarize yourself with the relevant convention, national legislation and analyze the documents available to the individual. The law firm Fedoryshyn and Partners can assist you with this, as it has a large number of successful cases in avoiding double taxation and is an expert in providing consultations on tax residency.

Author: Aliona Yevtushenko, lawyer at F&P

Horticulture is not only a way to provide yourself with environmentally friendly products but also a promising business that can bring a stable income. To start or scale a horticultural business, many entrepreneurs seek additional sources of funding. One such tool is grants.

In this publication, we will discuss the conditions and features of obtaining grants for business gardens.

General provisions

The issues regarding the provision of grants for the establishment of horticulture are regulated by the Procedure for Granting Grants for the Establishment or Development of Horticulture, Berry Growing, and Viticulture, approved by the Resolution of the Cabinet of Ministers of Ukraine dated 21.06.2022 No. 738 (hereinafter – Procedure No. 738) and the Procedure for Making a Decision by the Ministry of Agrarian Policy and Food on Granting a Grant for the Establishment or Development of Horticulture, Berry Growing, and Viticulture, approved by the Order of the Ministry of Agrarian Policy and Food of Ukraine dated 12.07.2022 No. 447, registered with the Ministry of Justice of Ukraine on 19.07.2022 under No. 801/38137 (hereinafter – Procedure No. 447).

According to Order No. 738, grants are provided for the planting and establishment of a new orchard, berry plantation, or vineyard (hereinafter referred to as plantings) with an area of 1 to 25 hectares, with the creation of new jobs or the involvement of new members in the farm.

Grants are provided up to 70% of the cost of the planting project, but not more than 10 million UAH, according to the amount per hectare and on the condition that the recipient funds (own and/or borrowed) the difference between the cost of the planting project specified in the application and the amount of the grant. The recipient’s co-financing share must be at least 30% of the cost of the planting project specified in the application.

In accordance with current legislation, the grant recipient is obliged to create jobs and employ individuals on a full-time basis, ensuring that their wages are no less than the legally established minimum wage.

Additionally, it is worth noting that according to Order No. 738, the number of jobs for permanent and seasonal workers, as well as the planned areas for planting fruit and berry crops and vineyards, are determined.

Requirements for individuals who can receive a grant

Grant recipients can be individual entrepreneurs and legal entities engaged in agricultural crop cultivation activities, in particular those who:

• do not actually stay and do not conduct economic activities in areas of active hostilities or temporarily occupied territories, included in the list of areas where hostilities are (were) taking place or temporarily occupied, for which no date of completion of hostilities or temporary occupation has been determined;
• do not conduct economic activities on the territory of the Russian Federation and Belarus;
• not classified as legal or natural persons to whom special economic and other restrictive measures apply, in accordance with the Law of Ukraine “On Sanctions”;
• which are not credit or insurance organizations, investment or non-state pension funds, professional participants in the securities market, or pawnshops;
• do not engage in the production and/or sale of weapons, alcoholic beverages (except for the production (without the addition of alcohol) and/or sale of grape wines, fruit and berry wines, honey drinks), tobacco products, or currency exchange;
• regarding which bankruptcy proceedings have not been initiated and/or which have not been declared bankrupt, and/or which are not in the liquidation stage;
• regarding which there is no court decision that has entered into legal force on bringing to criminal responsibility for a corruption offense;
• do not have any debts to the budget.

Requirements for the land plot.

1. The land plot must be classified as “agricultural land.”
2. A plot of land with an area from 1 to 25 hectares.
3. The implementation of the planting project by the recipient must be carried out on lands where the right of ownership and/or use is confirmed by the appropriate title documents for a period of no less than 7 years from the date of application submission.

The procedure for obtaining a grant for a garden.

1. Document preparation.

To receive the grant, the recipient must prepare a planting project (example) and an irrigation project (in case there is no corresponding section with calculations in the planting project) indicating the water source for all crops except for grapes.

2. Submission of the application.

The application is formed using the Diia Portal or through a selected systemically important authorized bank (their list is posted on the website) in any form, with the mandatory indication of:

• information from the State Register;
• name of the authorized bank;
• grant request amounts (in the national currency);
• shares of own and/or borrowed funds in the afforestation project;
• the total cost of the planting project taking into account the grant funds;
• the planned number of hired permanent and seasonal employees;
• locations of the planting project;
• cadastral number of the land plot(s) for which the right of ownership and/or use is confirmed by the appropriate title documents;
• lease term for the land (if applicable);
• name of the crop plantings;
• area of plantations (hectares);
• project implementation period (months);
• notes regarding the affiliation of the manager, founders, and ultimate beneficial owners with politically exposed persons;
• in cases where the manager, founders, and ultimate beneficial owners are founders of other legal entities, information about such legal entities is provided;
• in cases where the manager, founders, and ultimate beneficial owners are the founders of corporations, information about the corporation is provided.

3. Checking the task.

The authorized bank reviews the application within five working days, enters it into the register of submitted applications, and submits it to the Ministry of Agrarian Policy. If this body identifies a discrepancy between the recipient and the requirements of Order No. 738, it informs the recipient within seven working days through the Diia Portal.

4. Decision on receiving the grant.

The decision to grant or deny grants is made by the Ministry of Agrarian Policy in the manner prescribed by it within ten working days, formalized by an order, and sent through the Diia Portal. Additionally, the Ministry of Agrarian Policy informs the Ministry of Economy about the decision made regarding the granting or denial of grants.

5. Conclusion of the grant agreement.

After the Ministry of Agrarian Policy makes a decision to grant the subsidy, the recipient must, no later than within seven working days from the date of receiving information about such a decision, conclude a grant agreement in the form of accession at the branch of an authorized bank, in the form approved by the Ministry of Agrarian Policy, and also open an account at the branch of the authorized bank with no right to use it for purposes other than paying bills for the implementation of the submitted planting project.

6. Implementation of funds.

The recipient independently transfers the entire amount of funds (own/credit) of their co-financing share within 30 calendar days from the date of the contract. The unused balance of funds in the recipient’s account after 12 months from the date the grant is credited to such an account is returned to a special account of an authorized bank for further transfer of funds to the Ministry of Economy’s account for the purpose of returning to the state budget.

Conclusions

Receiving grants for horticulture is a promising tool for supporting the agricultural business, but the procedure requires precise adherence to requirements and a well-founded approach to planning. Legal support at the stages of application preparation, compliance verification, and grant agreement signing minimizes the risk of rejection and promotes the effective use of funding. We recommend that potential applicants seek professional legal assistance to ensure compliance with all regulatory requirements and optimize the grant acquisition process.

Author: Oleksandr Fedoryshyn, Managing Partner at F&P

Quite often, we face a lack of awareness among businesses about the mechanisms that allow them to simplify customs procedures and speed up business processes through the institution of an authorised economic operator (AEO).

Since 2019, the functioning of the AEO institution has been attracting increasing attention in Ukrainian legislation and in practice since 2021. Thus, while in 2021 only one company received the relevant status, today their number has grown to several dozen and is approaching a hundred.

The main aim of obtaining AEO status is to make it easier for your business. Of course, this does not mean complete distancing from customs control procedures, but depending on the simplifications received, the company will be able to save time, money, technical, and other resources in the international supply chain.

The Customs Code (CC) provides for two types of authorizations: AEO-B and AEO-C. The difference between them is that both types offer enterprises advantages such as priority in customs formalities, reduced control forms within the ASUR, and the use of the national AEO logo. However, only AEO-B allows receiving notifications from the customs authority about the selection of goods and vehicles designated for customs inspection.

At first glance, it may seem that businesses should choose the AEO-B type due to the greater number of advantages, particularly for work planning. However, the reality is that not all legally guaranteed simplifications actually work in practice. For example, special traffic lanes at border crossing points are often absent.

It is important to note that the legislation provides the option to choose: to obtain AEO status or to apply for authorization for the use of simplifications, end-use procedures, or transit simplifications.

Considering financial stability and other parameters, enterprises most often seek authorization to apply simplifications such as a general guarantee with a reduction of the base amount security by 50% or 70%, self-application of special type seals, as well as the procedure of release at the place of location.

Other types of simplifications defined by legislation and that can be obtained include general guarantee, exemption from guarantee, simplified declaration procedure. Moreover, after obtaining one simplification, the enterprise can apply for an additional one.

Customs legislation defines various roles for enterprises that can obtain AEO status, including manufacturer, exporter, importer, customs representative, carrier, freight forwarder and warehouse keeper. Often, one company can perform several roles, for example, being a manufacturer, exporter, and importer simultaneously.

Depending on the role, the company will have to delve into the description of internal processes, involving a large number of structural units responsible for accounting, customs, IT, HR, legal, production, security, or other areas in the processing or even development of documents.

From our practice, the necessary documents that need to be developed and implemented by the enterprise include:

• provisions for interaction with customs authorities;
• document flow procedure;
• accounting policy provisions;
• internal control procedures;
• algorithm for registering goods flows during export;
• algorithm for registering goods flows during import;
• provisions on information and principles of information security;
• policy for creating and storing backups;
• other internal rules, instructions, processes, and procedures (or their equivalents).

Obviously, one of the biggest challenges in obtaining AEO status or authorization of simplifications is the establishment of all documentation procedures, as well as the actual work of the company’s departments that are related to the international supply chain of goods in accordance with the developed internal documents.

It is precisely the outlined points that serve as the main markers during the inspection of the company by customs authorities and the formation of their conclusions regarding the compliance (non-compliance) of the enterprise with the criteria and/or conditions for granting authorization or relevant simplifications.

The decision to grant authorization is formalized by an appropriate order of the State Customs Service, and the enterprise is issued a permanent certificate.

The Fedoryshyn & Partners team has significant experience and invites collaboration on matters related to obtaining AEO status or authorization of simplifications.