The Role of Fault in Applying Sanctions for Tax Violations

Tax violations in Ukraine go far beyond simple calculation errors—they require a complex legal assessment of the taxpayer’s intent and behavior. Current judicial and regulatory practice demonstrates a notable shift toward recognizing the importance of the fault factor when determining liability. Understanding this aspect is critically important for both taxpayers and tax authorities, especially against the backdrop of a growing number of cases where the notion of intent is manipulated to unjustifiably impose higher penalties.

What is Fault in the Context of Tax Violations?

According to Article 109 of the Tax Code of Ukraine, a tax violation is an unlawful, blameworthy act (action or inaction) committed by a taxpayer, tax agent, controlling body or its officials, as well as other persons in cases provided by the Code.

Like any offense, a tax violation has four components:

• Object: The legal relations protected by law—in this case, the procedure for administering taxes and duties.
• Objective element: The external manifestation of the violation—specific actions or omissions that break the law, their consequences, and causal links.
• Subject: The person held responsible (taxpayer, agent, or other responsible entity).
• Subjective element: The individual’s internal attitude toward the act—fault, which may take the form of intent or negligence.

Although the Code does not yet contain a definition of fault, this category is key in legal practice. A person is considered at fault if they failed to take sufficient measures to comply with the law, despite having the opportunity to do so.

Statutory Basis for Fault

Subparagraphs 112.1 and 112.2 of Article 112 of the Tax Code establish the conditions under which a person can be held liable:

• If they could have complied with legal requirements but failed to take sufficient action;
• If the tax authority proves that the taxpayer acted in bad faith, without reasonableness and due diligence.

The burden of proof lies with the tax authority. If fault is not proven, liability cannot be imposed. All doubts are interpreted in favor of the taxpayer.

Fault Is Not Always Mandatory

Fault is a qualifying feature only in certain cases. It is directly stipulated for specific types of violations—in particular, in Articles 123.2–123.5, 124.2–124.3, and 125-1.2–125-1.4 of the Tax Code.

For example, Article 124 stipulates that for overdue tax payments:

• Up to 30 days late — a 5% fine of the debt amount;
• More than 30 days — 10%;
• If intentional — 25%.

Thus, the degree of fault directly affects the amount of the penalty.

How to Prove Intent?

Intent is established if the tax authority proves that the taxpayer consciously created conditions aimed at evading tax obligations to gain tax benefits.

Signs of intent may include:

• Creation of fictitious business operations;
• Lack of economic rationale;
• Agreements that do not reflect the actual substance of transactions;
• Absence or defects in primary documentation.

But most importantly—these must be proven with appropriate evidence. In their absence or in case of doubt—the presumption of innocence applies.

Case Law: Position of the Supreme Court

Since 2021, the Supreme Court of Ukraine has consistently developed a practice clearly defining the criteria for the presence of fault.

Key rulings include:

• 08.12.2022, case No. 520/9294/21 — the first detailed analysis of intent in tax cases.
• 16.03.2023 (No. 600/747/22-a), 03.08.2023 (No. 520/22505/21), 22.08.2023 (No. 520/18519/21) — the court determined that higher fines cannot be applied without proof of fault.
• 05.10.2023, case No. 520/14773/21 — the court confirmed the obligation to prove fault, and this position is binding on lower courts (Part 5, Article 242 of the Code of Administrative Procedure).

A Concrete Example: Reducing the Penalty

In case No. 160/24147/21 (16.11.2023), the tax authority imposed a 50% fine, considering the actions intentional. The Supreme Court found that a previous violation had already been overturned, and no direct evidence of intent was presented. Therefore, the court applied the basic rate of 5%, reducing the penalty from UAH 3.06 million to UAH 306,000.

Desk Audits: Limitations

In a decision dated 31.10.2024 in case No. 120/15159/23, the Cassation Administrative Court stated: it is impossible to prove intent within the framework of a desk audit. Therefore, the imposition of increased penalties in such cases is illegal.

Modern tax practice requires a clear determination and proof of fault. Its presence or absence determines not only the amount of fines but also legal consequences. Observing the presumption of innocence and the burden of proof on tax authorities are key conditions for the legality of tax sanctions in Ukraine.