SFS drops additional payment worth around UAH 2 mn for asset management company 

Tax issues: Inspections by state tax and fiscal agencies Kyiv region

Subject of complaint: The State Fiscal Service (SFS)
Complaint in brief: An asset management company (AMC), portfolio of which includes a number of investment funds (IFs) turned to the Council. One of these funds financed construction of a residential complex. Under the terms of previous sale contracts (preliminary contract), future apartment owners had transferred funds to IFs. In its turn, AMC committed to concluding basic contracts and transfer ownership to apartment buyers after construction was complete.
During the audit, the tax officers concluded that AMC must pay income tax on funds raised under preliminary agreements.
It should be noted that construction financing through the IFs and AMC is quite a common business model on the real estate market. In the framework of the investigation we did not analyze whether such a model was balanced in terms of risks allocation and ensure of investors’ rights and were focused only on tax consequences of such transactions for AMC.
Actions taken: The investigator examined inspection materials and the Complainant’s position. He found out that Tax Code indeed did not contain a provision clear enough as to whether AMC had to pay income tax on obtained funds under preliminary contracts or not. At the same time, the SFS provided several individual tax advices that such funds were exempt fromcorporate profit tax. According to the Council, any government agency should act as consistently and predictably as possible, as required, in particular, by clarifications provided earlier. The Council urged the SFS to apply the approach set out in individual advice on the same issue for other taxpayers to the Complainant. The Council’s investigator participated in the complaint consideration and stressed the need to adhere to the principle of presumption of legality of the taxpayer’s actions.
Result achieved: The tax authority dropped the additional payment worth around UAH 2 mn of income tax and scheduled a new inspection on this issue. The issue raised in the complaint is important for all real estate market players as the described business model is quite common. In the Council’s view, the SFS approach to tax consequences of such transactions should be as consistent and predictable as possible as well as meet equality principle of taxpayers.

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