Tax debt of a sole proprietor cannot be written off solely because it arose before insolvency — Commercial Cassation Court of the Supreme Court

To write off the tax debt of an individual in insolvency proceedings, it is not enough to establish only that it arose within three years before the opening of the proceedings. The commercial court must determine the moment the tax debt arose according to the Tax Code of Ukraine, verify the debtor's financial condition, their good faith, the results of declaration checks, and compliance with debt restructuring procedures. Without establishing these circumstances, the conclusion about recognizing the tax debt as hopeless and writing it off is premature.

This conclusion was reached by the judicial panel for bankruptcy cases of the Commercial Cassation Court within the Supreme Court.

Lower courts recognized the tax debt of an individual entrepreneur as hopeless and subject to write-off under part 2 of article 125 of the Law of Ukraine "On Insolvency (Bankruptcy)" because it arose within three years before the opening of insolvency proceedings. Subsequently, the proceedings were closed due to the satisfaction of creditors' claims.

Upon review, the Supreme Court noted that the concept of "tax debt" for the purposes of applying part 2 of article 125 of the Law on Insolvency must be defined taking into account the provisions of the Tax Code of Ukraine. Tax debt arises not from the moment of issuance of a tax notice-decision or a court decision on collection, but from the moment of overdue payment of the agreed monetary obligation. This moment must be considered when determining the three-year period stipulated by the Law on Insolvency.

The judicial panel emphasized that the write-off of tax debt is not an automatic consequence of opening insolvency proceedings. This issue must be resolved within the debt restructuring procedure after verifying the debtor's financial condition, the results of declaration checks, availability of assets to repay the debt, and assessment of the debtor's good faith.

The Supreme Court stated that the insolvency institution for an individual entrepreneur is aimed at protecting a good-faith debtor who objectively cannot fulfill their obligations and cannot be used as a mechanism for formal release from tax debt without proper judicial control.

Furthermore, the Supreme Court clarified that the issue of recognizing tax debt as hopeless and writing it off may be raised by the debtor, creditor, controlling authority, or restructuring manager, but the final decision on the grounds for applying part 2 of article 125 of the Law on Insolvency is made by the commercial court within judicial control over insolvency proceedings.

Since the lower courts did not establish circumstances regarding the debtor's solvency or insolvency, did not examine the results of declaration checks, did not analyze the completeness of asset inventory, and did not clarify the debtor's good faith, the conclusion about the possibility of writing off the tax debt as hopeless was deemed premature.

Accordingly, the Supreme Court concluded that the local commercial court had no grounds to close the insolvency proceedings due to satisfaction of all creditors' claims according to the creditors' claims register.

Under these circumstances, the Supreme Court annulled the decisions of the lower courts and sent the case back for a new trial at the first instance court at the stage of the debtor's debt restructuring.

The ruling of the Commercial Cassation Court of the Supreme Court dated May 27, 2026, in case No. 908/1194/24 can be found at this link. https://reyestr.court.gov.ua/Review/137027613

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