Tax consequences of UAV strikes: VAT and profit tax upon asset liquidation

The armed aggression of the Russian Federation inflicts daily damage on Ukrainian businesses. However, besides the physical loss of property, enterprises face additional challenges. A missile strike or the consequences of UAV hits not only cause asset loss but also require prompt resolution of legal and tax issues. After documenting damage or destruction, the enterprise must properly prepare documents, conduct an inventory, write off the property, and reflect the corresponding operations in accounting and tax records.

Unfortunately, such situations are not uncommon in today’s realities. One enterprise that suffered significant material damage due to UAV strikes approached the State Tax Service for a tax consultation, asking, among other things, whether it is necessary to accrue VAT tax liabilities on inventories and fixed assets that were destroyed and subject to write-off, and whether humanitarian aid received for restoring destroyed fixed assets and other property is taxable.

Which assets are subject to write-off: what the enterprise needs to consider

The first step after documenting the loss of property is to determine which asset was destroyed. This affects the procedure for its write-off, accounting treatment, and tax consequences.

For tax purposes, two main categories of assets are distinguished:

• fixed assets — tangible assets with an initial cost exceeding UAH 20,000 and an expected useful life of more than one year;
• inventories (inventories and materials) — goods, raw materials, materials, and other assets used in business activities that are not fixed assets.

The Tax Code defines business activity as activity aimed at generating income. After destruction, the property effectively ceases to be used in such activity.

As a general rule, this may lead to VAT tax liabilities upon asset write-off, however, for property destroyed due to hostilities, missile strikes, or UAV attacks, the legislation during martial law provides special rules that significantly alter the general taxation procedure.

VAT upon liquidation of fixed assets: without taxpayer consent

According to clause 189.9 of the Tax Code of Ukraine, liquidation of fixed assets by the taxpayer’s own decision is equated to supply. However, this provision does not apply if the assets were destroyed due to force majeure or without the taxpayer’s consent.

To apply this exception, the fact of destruction or damage to the fixed asset must be documented in accordance with legal requirements.

The taxpayer must submit to the controlling authority the relevant document on destruction, dismantling, or transformation of the asset that makes its use impossible as intended.

If such confirmations are available, the operation is not considered a supply of goods, and therefore there is no obligation to accrue VAT tax liabilities, including under the rules of clause 198.5 of the Tax Code of Ukraine.

Thus, proper documentation of property destruction is a key condition for applying the tax benefit and avoiding VAT recalculation when writing off fixed assets damaged or destroyed due to armed aggression.

VAT and write-off of goods

For goods destroyed during martial law, a special exemption applies under clause 321 of subsection 2 of section XX of the Tax Code. Such goods are not considered used in non-business activities if destroyed due to force majeure.

The provisions of clause 198.5 of the Tax Code do not apply to such operations, so "compensatory" VAT is not accrued. To apply this provision, a Chamber of Commerce and Industry certificate confirming force majeure is mandatory.

To protect the right to non-accrual of VAT and the legitimacy of expenses, entrepreneurs need to collect the following documents:

• Chamber of Commerce and Industry certificate confirming force majeure circumstances (circumstances of insurmountable force).
• Extract from the Unified Register of Pre-trial Investigations confirming the registration of a criminal offense (e.g., shelling or theft of property).
• Inventory acts regarding the inventory conducted, mandatory on the day the facts of damage or destruction of valuables are established.
• Acts from the State Emergency Service in case of fire caused by a strike, a necessary act signed by a commission including representatives of the State Emergency Service.
• Registry data, namely an extract on termination of ownership rights to real estate (Article 349 of the Civil Code of Ukraine).

Profit tax: how the write-off of destroyed property is accounted for

When determining the tax consequences of writing off property destroyed due to hostilities, enterprises should also consider the rules for profit tax. The taxable object is formed based on the financial result before taxation according to accounting data, which is adjusted for tax differences provided by the Tax Code of Ukraine if necessary.

For taxpayers applying differences according to Article 138 of the Tax Code, a special procedure applies when liquidating fixed assets:

• the financial result before taxation increases by the amount of the residual value of the destroyed fixed asset determined according to accounting rules (National Accounting Standards or IFRS);
• the financial result decreases by the amount of the tax residual value of such an object calculated according to clause 138.2 of the Tax Code of Ukraine.

Thus, the law provides separate adjustments to the financial result for fixed assets that must be considered when calculating profit tax.

Write-off of inventories: no separate differences

A different approach applies to inventories. The Tax Code does not contain special differences regarding the write-off of inventories destroyed due to missile strikes, UAV attacks, or other hostilities.

Therefore, inventory losses are recognized according to accounting rules and included in the financial result without any additional adjustments for profit tax purposes.

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