VAT Included in a Supply Contract Cannot Be Challenged Where the Statutory Conditions for VAT Exemption Were Not Met
⚖️ Ukraine | Commercial Disputes | Supply Contracts | VAT
Case Details
Case No.: 910/12764/20
Court: Supreme Court, Joint Chamber of the Commercial Cassation Court
Decision Date: 3 December 2021
Case Category: Commercial Law
Subject Matter: Supply Contract / Contractual Price / VAT
Sub-Subject: VAT Exemption / Partial Invalidity of Contract / Medical Equipment
Contract: Supply Contract No. 32 dated 29 May 2020
Goods: Medical equipment
Total Value of Goods Supplied: UAH 1,492,131.75
Disputed VAT: UAH 96,708.17
Key Issue: Whether a supply contract may be declared invalid in the part including VAT in the contractual price where the statutory conditions for exemption from VAT were not satisfied
Outcome: The Supreme Court held that the VAT exemption did not apply because the statutory requirements under Cabinet of Ministers Resolution No. 224 had not been satisfied in respect of the relevant goods. There was therefore no legal basis for invalidating the contract in the part concerning VAT or recovering the VAT amount from the supplier. Вставлений текст
Background of the Dispute
A municipal hospital entered into a supply contract with a private company for the purchase of medical equipment.
The supplier subsequently delivered medical goods with a total value of UAH 1,492,131.75, and the hospital paid for the supplied equipment. VAT was charged in relation to some of the supplied goods, while other items were supplied without VAT. Вставлений текст
The local prosecutor challenged the transaction in the interests of the state.
The prosecutor argued that the relevant medical equipment fell within the special COVID-19 regime introduced by paragraph 71 of Subsection 2 of Section XX of the Tax Code of Ukraine and Cabinet of Ministers Resolution No. 224 of 20 March 2020.
According to the prosecutor, the relevant supplies should therefore have been exempt from VAT.
The prosecutor sought:
invalidation of the supply contract in the part providing for VAT; and
recovery of UAH 96,708.17 from the supplier as allegedly unjustifiably received funds.
The first-instance commercial court dismissed the claim. The Northern Commercial Court of Appeal upheld that judgment. Вставлений текст
When Does the VAT Exemption Apply?
The central issue was whether the supplied goods actually qualified for the special VAT exemption.
Paragraph 71 of Subsection 2 of Section XX of the Tax Code introduced a temporary exemption from VAT for operations involving certain goods necessary for measures aimed at preventing and combating COVID-19.
The categories of goods covered by the exemption were specified by the Cabinet of Ministers in Resolution No. 224.
However, the Supreme Court confirmed that the fact that particular goods could fall within the relevant list did not automatically mean that every transaction involving those goods was exempt from VAT. Вставлений текст
Inclusion in the Relevant List Was Not Enough
Resolution No. 224 established additional requirements for certain medical devices, medical equipment and other relevant goods.
Depending on the category concerned, the VAT exemption required appropriate documentation confirming compliance with the applicable technical regulations.
This could include a declaration of conformity together with the required conformity marking or, where the technical regulations had not been satisfied, the relevant notification from the Ministry of Health or the State Labour Service concerning the placing of the goods on the market or their operation.
Accordingly, qualification for the exemption depended not merely upon the description of the goods but also upon compliance with the regulatory conditions attached to the exemption. Вставлений текст
The Required Conditions Were Not Satisfied for the Goods Subject to VAT
The courts examined the documentation relating to the individual goods supplied under the contract.
For some items, declarations of conformity existed and VAT had not been charged.
However, with respect to the goods on which VAT had been charged, the necessary declarations of conformity with the relevant technical regulations or the alternative notifications required under Resolution No. 224 were absent.
The courts therefore concluded that the statutory conditions necessary for treating those supplies as VAT-exempt had not been established. Вставлений текст
This distinction was decisive.
The existence of a general COVID-19 VAT exemption did not eliminate the obligation to establish that the particular transaction satisfied the legal requirements for benefiting from that exemption.
Inclusion of VAT Did Not Violate Ukrainian Law
Because the necessary conditions for the exemption had not been satisfied, the Supreme Court concluded that the relevant supplies were not exempt from VAT.
The inclusion of VAT in the contractual price therefore did not violate paragraph 71 of Subsection 2 of Section XX of the Tax Code or Resolution No. 224.
As a consequence, there was no substantive legal defect in the disputed part of the supply contract.
The Court therefore found no basis for declaring the contract invalid in the part concerning the inclusion of VAT. Вставлений текст
Is VAT an Essential Contractual Price Term?
The Supreme Court also addressed a broader issue concerning the legal nature of VAT within a contractual price.
This question was important because Ukrainian law permits a court, in certain circumstances, to invalidate only part of a transaction.
Article 217 of the Civil Code provides that invalidity of one part of a transaction does not necessarily result in invalidity of the transaction as a whole if it can be assumed that the transaction would have been concluded without the invalid provision.
The Supreme Court considered that a supply contract could, in principle, exist without the provision concerning VAT. Вставлений текст Вставлений текст
The Court then made an important distinction between the contractual price and VAT.
Although VAT is included in the amount payable for goods, the Court held that VAT is not a contractual price term in the sense of civil and commercial legislation, because the parties cannot establish, negotiate or change VAT by agreement.
The obligation to charge VAT and its amount arise from tax legislation rather than from the parties' contractual autonomy. Вставлений текст
The Supreme Court Departed From Its Previous Approach
The Joint Chamber also addressed conflicting Supreme Court case law.
In its earlier judgment of 8 April 2021 in Case No. 922/2439/20, the Supreme Court had proceeded on the basis that a contractual provision including VAT formed part of the unit price of the goods and therefore constituted an essential term of the contract.
On that reasoning, the contract could not be declared invalid solely in the part relating to VAT. Вставлений текст
The Joint Chamber departed from that position.
It held that the fact that VAT is included in the amount payable does not transform VAT itself into a contractual term freely determined by the parties.
Accordingly, the previous proposition that the VAT component could not be separately invalidated merely because it formed part of the contractual price was rejected. Вставлений текст
This Did Not Mean That the Contract Was Invalid in This Case
The distinction is important.
The Supreme Court did not hold that the VAT provision in the contract before it was invalid.
Instead, it rejected the earlier categorical reasoning that a VAT component could never be considered separately because it constituted an essential price term.
Whether there is a legal basis for challenging the VAT component still depends on whether VAT was charged contrary to applicable tax legislation.
In the present case, the necessary conditions for the VAT exemption had not been satisfied.
VAT was therefore properly included in the price, and there was no unlawful contractual provision to invalidate.
The Claim for Recovery of VAT Also Failed
The prosecutor additionally sought recovery of UAH 96,708.17 from the supplier.
That claim depended upon establishing that the supplier had received VAT without a proper legal basis.
Because the courts found that VAT had lawfully been charged on the relevant goods, the principal challenge to the contract failed.
The related monetary claim consequently failed as well. Вставлений текст
The Supreme Court’s Decision
The Joint Chamber of the Commercial Cassation Court dismissed the cassation appeal.
It left unchanged the judgment of the Commercial Court of Kyiv of 26 November 2020 and the judgment of the Northern Commercial Court of Appeal of 26 April 2021.
The claim seeking partial invalidation of the supply contract and recovery of UAH 96,708.17 was therefore finally dismissed. Вставлений текст
At the same time, the Joint Chamber expressly departed from the legal conclusion previously adopted in Case No. 922/2439/20 concerning the impossibility of separately invalidating the VAT component of a contract merely because VAT forms part of the contractual price. Вставлений текст
Why This Decision Matters
The judgment clarifies two separate questions that should not be conflated.
First, entitlement to a statutory VAT exemption depends on satisfying the conditions imposed by the relevant legislation. The fact that goods belong to a category potentially covered by an exemption does not necessarily establish that the particular transaction is exempt.
Second, VAT and the commercial price agreed by the parties are legally distinct concepts.
Although VAT ultimately forms part of the amount paid by the buyer, the parties do not determine the applicable VAT regime through contractual negotiations. The tax consequences arise by operation of law.
The decision is particularly relevant where:
goods are supplied under a statutory VAT exemption regime;
the exemption depends upon certificates, declarations or regulatory approvals;
a buyer seeks recovery of VAT allegedly charged without legal grounds;
a contractual provision concerning VAT is challenged as invalid;
public procurement contracts involve potentially VAT-exempt goods; or
a dispute concerns whether the VAT component can be separated from the remainder of the contractual price.
Lions Lawyers’ Analysis
The practical significance of the judgment extends beyond the specific COVID-19 exemption considered by the Supreme Court.
Where Ukrainian legislation provides a tax exemption subject to specified conditions, the decisive question is not simply whether the goods appear to fall within the general category covered by the exemption. The contractual parties must determine whether all legal and documentary requirements applicable to the particular transaction have actually been satisfied.
The case also demonstrates the importance of separating the commercial terms agreed by the parties from tax consequences imposed by legislation.
A contractual price results from the parties' agreement. VAT liability does not. The applicable VAT treatment follows from tax law and cannot be created or eliminated merely by describing the contractual price as including or excluding VAT.
This distinction may become particularly important in disputes involving recovery of allegedly overpaid VAT, partial invalidity of contractual provisions, public procurement and transactions involving goods subject to preferential tax treatment.
For foreign businesses contracting in Ukraine, the judgment also illustrates why the tax treatment stated in a Ukrainian supply contract should not be treated as conclusive. Where a transaction relies on an exemption, the underlying statutory conditions and supporting regulatory documentation should be verified independently.
Lions Lawyers advises Ukrainian and international clients on commercial contracts and disputes in Ukraine, including supply agreements, contractual pricing, VAT-related contractual disputes, public procurement, recovery of payments, invalidity of contracts and cross-border commercial transactions. We provide full-service legal representation as well as standalone legal opinions, enabling clients to assess their existing strategy and, where appropriate, identify alternative legal approaches.
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