As a general rule, it is international practice for banks and other financial institutions to charge fees for processing loan applications, and for opening and servicing credit lines. Cases tried before the commercial courts of Ukraine demonstrate that taxpayers and the tax authorities have a different understanding of these operations from the point of view of the Law of Ukraine "On Value Added Tax" (hereinafter, the "VAT Law").In one such case, a company resident in Ukraine and a non-resident financial institution concluded a loan agreement. The loan agreement provided for payment of interest and loan fees, which is set as a percentage of the loan principal. Loan fees were consideration for the processing of the loan application and opening a line of credit.

 

The resident company remitted to the creditor a loan fee in the amount of 3% of the agreement's value.As a result of a tax audit, the tax authorities concluded that the resident company understated the taxable base of imported services by not reporting loan fees as VATable services, which led to an understatement of the VAT liability. Moreover, in the period under review the company was not registered as a VAT payer. The tax authorities refer to part 2, paragraph 4.2, Article 4 of the VAT Law under which the taxable base for the services supplied by non-residents within the customs territory of Ukraine is the contractual price of these services.

 

Pursuant to subparagraph 7.3.6, Article 7 of the VAT Law, the date for accrual of tax liabilities is the date of remitting the funds to the creditor, i.e. the date of the initial event. In this respect the tax authorities issued a tax resolution under which VAT and penalties were additionally accrued to the company. The resolution of the tax authorities was appealed by the resident company in the commercial courts. The company stated that its actions were lawful, as under subparagraph 3.2.5, Article 3 of the VAT Law, operations on granting, managing and transfer of financial loans are not subject to VAT. The first instance court upheld the company's claim and declared the tax authorities resolution null and void.

 

The court of appeal confirmed the resolution of the previous court. The Higher Commercial Court of Ukraine considered the appeal filed by the tax authorities and made the following conclusions. Under paragraph 3.1, Article 3 of the VAT Law, VAT is imposed, in particular, on taxpayers' operations on import of goods into the customs territory of Ukraine and receipt of services rendered by non-residents for their use or consumption in the customs territory of Ukraine. According to subparagraph 1.11.1, Article 1 of the Law of Ukraine "On Corporate Income Tax," a loan is monetary funds provided by a resident or non-resident bank, or resident or non-resident non-banking financial institutions based on applicable legislation, as a loan to a legal entity or individual for a defined period, for special purpose and at interest. Under paragraph 12 of the Regulation of the National Bank of Ukraine on Granting Loans (version as of the date of conclusion of the loan agreement), commercial banks are entitled to determine the rules of attracting and using funds, making loan transactions, and fixing interests and loan fees.

 

As per paragraph 20 of the Regulation of the National Bank of Ukraine on Granting Loans, in order to protect its interests the bank analyzes the solvency of a potential borrower, assessing the risk of failure to repay the loan and makes a decision whether to grant or refuse a loan. Considering the above, the Higher Commercial Court of Ukraine agreed with the conclusions of the lower courts that the creditor's actions with respect to processing a loan application and opening a credit line are directly related to the granting of the loan under the loan agreement. Consequently, remittance of the loan fee, which is based on a percentage of the loan principal, in favor of the non-resident is part of the financial loan received by the plaintiff. According to subparagraph 3.2.5, Article 3 of the VAT Law, operations on granting, managing and transfer of financial loans are not subject to VAT.

 

Thus, the previous instance courts reached the correct conclusion that receipt of a loan from a non-resident and analysis of the application for granting a loan and credit line to a resident is not an import operation. Therefore, a loan fee for granting the loan is paid under the loan agreement pursuant to the relevant legislation.Thus, the Higher Commercial Court of Ukraine came to the conclusion that there was no basis for the additional accrual of VAT to the plaintiff. Taking into account that the plaintiff did not receive from the non-resident any works or services, he was not obliged to register as a VAT payer. This means that accrual of penalties to the company was also groundless.The position of the Higher Commercial Court of Ukraine outlined in its resolution dated 14.04.2005 under case No.33/429, is an important precedent in respect of the VAT treatment of credit operations, and taxpayers can rely on it in similar situations.

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