LLC Lost Dispute with Tax Authorities Regarding Accounting of a Joint Investment Activity Object with a Foreign Investor

The Fifth Administrative Court of Appeal reviewed case № 420/26610/25 filed by the company against the controlling authority. The appellate court concluded that there were no grounds to satisfy the appeal and upheld the decision of the Odessa District Administrative Court, which was made in favor of the tax authority. This was reported by the State Tax Service.

Case Circumstances

When deciding to deny the claims, the court of first instance recognized the claims of the LLC as unfounded, since the conclusions of the Audit Report dated 20.02.2025, which served as the basis for the disputed tax notices-decisions, were confirmed during the case review.

As established by the court of first instance and confirmed by the case materials, the plaintiff made accounting entries on 31.01.2024 Debet 103/104 Credit 1522 regarding the commissioning of fixed assets and entries Debet 92 Credit 13 regarding the accrual of depreciation of these fixed assets.

To confirm the above accounting entries, the following were provided during the audit: investment contract for construction/reconstruction, an additional agreement to it, an act approving the results of construction/reconstruction of the investment object under the investment contract for construction/reconstruction, a permit for construction works, a certificate issued based on the readiness act of the object for operation dated 05.01.2024; primary documents regarding transactions for the purchase of equipment, materials, design works, installation works, other works and services.

Position of the Appellate Court

It should be noted that the general legal, economic, and social conditions of investment activity in Ukraine are determined by the Law of Ukraine "On Investment Activity."

Article 9 of the Law of Ukraine "On Investment Activity" defines that the main legal document regulating relations between subjects of investment activity is a contract (agreement) or a securities prospectus (decision on securities issuance). Analysis of these legal norms indicates that an investment contract is a commercial-legal agreement concluded between subjects of investment activity (the customer and the investor), which records the fact of investing funds or other material or intellectual values into the investment object and defines the purpose (profit and/or social effect), regulating the rights and obligations of the parties.

Accordingly, investment activity (in a broad sense) can be carried out based on a contract and may be qualified as joint economic activity, carried out by combining contributions (investments) and efforts of participants to achieve their defined goal of activity (profit creation and/or achieving social effect).

Since, as noted, investment activity is not sector-specific and can relate to any sector and area of the economy, the contract mediating investment activity may be mixed, containing provisions of various types of commercial contracts depending on the subject and goals of investment (contract on joint activity, capital construction, lending, purchase-sale, trust management of property, etc.). A similar legal conclusion was set forth in the Supreme Court ruling dated 29.01.2019 in case №916/4644/15.

As established by the court of first instance and confirmed by the case materials, the subject of the investment contract for construction/reconstruction is the participation of the parties (Joint Stock Company (Switzerland) – Party 1, and the plaintiff – Party 2) in the construction/reconstruction of the investment object with subsequent acquisition of joint partial ownership of the real estate object under the terms and procedure provided by the contract, with simultaneous performance of the functions of the customer of construction/reconstruction of the investment object jointly by Parties 1 and 2. The contract conditions stipulate that after completion of construction/reconstruction and registration of documents regarding readiness of the object for operation, each party acquires the right of joint partial ownership of the object in accordance with the law.

Thus, such subject and conditions of the investment contract for construction/reconstruction fall under the definition of joint ownership rights.

In the Supreme Court ruling dated November 11, 2025, in case № 910/16929/21, it was stated that, unlike an investment contract primarily aimed at regulating relations related to attracting investments and whose purpose is to obtain income or property benefit by the investor (individual counterparty) from the investment, a joint activity contract is concluded to achieve a goal defined by the parties by combining contributions (investments) and efforts of participants. The legal consequences of a joint activity contract are achieving a result – obtaining property, performing work, or providing services for each counterparty.

It is also worth adding that from the investment contract for construction/reconstruction it is evident that a participant in such contract is a Joint Stock Company (Switzerland), i.e., a foreign investor, and therefore the disputed legal relations fall under the regulation of the Law of Ukraine "On the Regime of Foreign Investment," which defines the specifics of the foreign investment regime in Ukraine based on the goals, principles, and provisions of Ukrainian legislation.

According to Article 23 of the Law of Ukraine "On the Regime of Foreign Investment," foreign investors have the right to conclude contracts on joint investment activity (production cooperation, joint production, etc.) not related to the creation of a legal entity, in accordance with Ukrainian legislation. Article 24 of this Law provides that economic activity under such contracts is regulated by Ukrainian legislation.

The parties under such contracts must maintain separate accounting and prepare reports on operations related to the fulfillment of these contracts and open separate accounts in Ukrainian banks for settlements under these contracts. The contracts must be registered within the terms and procedure established by the Cabinet of Ministers of Ukraine. Thus, contracts on joint investment activity involving a foreign investor are subject to state registration with the Ministry of Economy and its authorized bodies, after which they must be recorded by the state tax authorities in Ukraine. Confirmation of state registration of the contract is a registration card, one copy of which is submitted to customs authorities for customs clearance of the relevant property, the second to the state tax authorities for registration, and the third remains with the person authorized by other parties to manage the joint affairs of the participants.

As correctly established by the court of first instance, the investment contract does not specify the party responsible for maintaining accounting of joint activity under this contract, nor does it define the joint activity operator, and the accounting of operations under this investment contract is conducted by the plaintiff – Party 2 of the contract – without separation from the accounting of its own economic activity.

Considering the above, the panel of judges believed that the court of first instance reasonably agreed with the arguments of the controlling authority that the plaintiff's accounting entries regarding the creation of the investment object under the investment contract and the accrual of depreciation should be accounted for outside the plaintiff's own activity accounting and not included in its financial reporting indicators.

The totality of the established facts led the appellate court panel to assert that the plaintiff, in violation of subparagraph 134.1.1 of paragraph 134.1 of Article 134 of the Tax Code of Ukraine, paragraphs 3, 19, 20 of Accounting Regulation (Standard) 12 "Financial Investments," approved by the Ministry of Finance of Ukraine order dated April 26, 2000, No. 91, registered with the Ministry of Justice of Ukraine on May 17, 2000, No. 284/4505 (as amended), paragraphs 1.3, 2.1-2.8 of Section II of the Methodological Recommendations on Accounting for Joint Activity Without Creating a Legal Entity, approved by the Ministry of Finance of Ukraine order dated December 30, 2011, No. 1873 (as amended), unjustifiably included depreciation of fixed assets within the object created jointly by the Joint Stock Company (Switzerland) and the plaintiff under the investment contract as part of other operating expenses when determining the financial result before taxation of the plaintiff's own economic activity, in the absence of documents defining the plaintiff as the joint activity operator under the investment contract, which resulted in the audit lawfully establishing an overstatement of other operating expenses in the financial results report by UAH 3,623 thousand and, consequently, an understatement of the financial result before taxation by the same amount.

Under these circumstances, the appellate court panel concluded that the tax notices-decisions adopted by the controlling authority were lawful.

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