Illegal Tax Notices-Decisions Cost the State Tax Service £150,000 in Retailer's Lawyer Expenses: Supreme Court Decision

For Ukrainian judicial practice, the allocation of court costs for professional legal assistance often falls within the realm of judicial discretion and procedural uncertainty. However, the Supreme Court Ruling dated July 16, 2026, in case No. 160/3364/19 brings a new level of objectivity to this issue.

Is 150,000 UAH a reasonable price for defence in a tax dispute worth 6 million? Over seven years of litigation, the parties progressed from challenging million-hryvnia tax notices-decisions to disputing every hryvnia of attorney fees.

Let’s delve into this Supreme Court case, which establishes a clear distinction between a lawyer’s entitlement to remuneration and the opponent’s duty to prove its disproportion.

From tax assessments to defence costs

The narrative began in April 2019 when a retailer lodged a lawsuit seeking the annulment of tax notices-decisions (TNDs) that augmented the company’s VAT and profit tax liabilities by a total of over 6 million UAH.

The tax authority accused the retailer of infractions related to VAT and profit tax. The court sided with the network’s stance on the legitimacy of business transactions with counterparts and dismissed the tax authority’s contentions, primarily founded on materials from criminal proceedings against suppliers' directors.

In this case, the Grand Chamber of the Supreme Court formulated a legal standpoint underlining that a taxpayer cannot automatically bear responsibility for potential violations by their counterparts. The regulatory body must substantiate that the taxpayer was aware of such violations and cooperated with the counterpart.

The court also highlighted that verdicts or rulings on exemption from criminal liability under Article 205 of the Criminal Code of Ukraine (fictitious entrepreneurship) do not inherently preclude tax disputes and are insufficient grounds to deny the taxpayer a tax credit or expenses.

Following the complete satisfaction of the company’s claim, the plaintiff claimed 375,050 UAH for legal assistance costs. This amount was approximately 6% of the claim value, which, according to the Company, was entirely proportionate to the case’s magnitude.

Procedural marathon

The case concerning costs underwent several phases:

2020–2022: The Court of Appeal granted 150,000 UAH, but the Supreme Court overturned this decision in 2024, citing insufficient justification.

2025: Upon reconsideration, the Court of Appeal reaffirmed the amount of 150,000 UAH, considering the "simplicity of the case" due to established practice.

July 16, 2026: The Supreme Court upheld this ruling, dismissing the tax authorities' cassation appeal.

Why 150,000 UAH emerged as the final verdict: criteria of proportionality and reality

The appellate court and subsequently the Supreme Court applied the criteria of reasonableness, reality, and proportionality.

The court deemed that although the dispute amount was substantial, the legal relations were not excessively intricate. The Court of Appeal, concurred with by the Supreme Court, exercised the right to reduce costs. The primary argument was that case support did not necessitate "extraordinary efforts" since there was already established and publicly accessible judicial practice on the disputed VAT issues. Consequently, the court shielded the budget from undue payments while ensuring attorneys received fair compensation for actual work.

The plaintiff furnished a comprehensive description of the work, acceptance-transfer acts, and bank statements verifying the actuality of the payment.

Conversely, the tax authority did not present any counter-calculation. The defendant merely made general statements about the dispute’s simplicity without refuting any specific service or time spent by the attorney.

Illegal TNDs are costly for the tax authority

Issuing unlawful tax notices-decisions results in substantial direct financial losses for the regulatory body’s budget.

According to the Code of Administrative Procedure of Ukraine, particularly Article 139, if a claim is ruled against a party that is not a public authority, all court costs are recuperated solely at the expense of the budget allocations of the state body that lost the case.

In this instance, the tax service had to cover a court fee of 48,025.50 UAH and professional legal assistance costs of 150,000 UAH.

The tax authority endeavoured to reclaim over 6 million UAH from the retailer, but due to the acknowledgment of these TNDs as unlawful, the tax authority did not receive the anticipated 6 million for the budget and also disbursed nearly 200 thousand hryvnias in compensation to the plaintiff.

Apart from finances, unlawful decisions are expensive in terms of state resources. This case spanned from 2019 to 2026, undergoing various rounds of consideration, including the Cassation Administrative Court within the Supreme Court.

Declaring TNDs as unlawful transforms potential budget income into an actual expense. As payments are sourced from the tax authority’s own budget allocations, this directly impacts the financial performance of the respective State Tax Service department.

Key conclusions for practice

The state cannot presume an automatic reduction of attorney fees solely based on its status. Without a detailed counter-calculation, courts will uphold significant compensation amounts.

The optimal approach for the tax authority to save budget funds is to refrain from issuing questionable TNDs that are highly likely to be invalidated in court.

For businesses, this case demonstrates that a detailed description of work outlining hours, dates, and specific actions serves as a safeguard for attorney fees in administrative proceedings.

Subscribe to our Telegram channel t.me/sudua, follow SUD.UA on Google News , and join us on VIBER, WhatsApp, Facebook and on Instagram to stay informed about the important events.