Yevheniia Skorokhod,
Transfer Pricing Consultant
Table of Contents
Are the companies not related? The tax authorities may think otherwise.
Many believe that if two companies (a Ukrainian entity and a foreign entity) have different owners, the tax authorities have no grounds to classify transactions between them as controlled. However, even if companies are not formally related through direct equity ownership, significant risks of establishing de facto relatedness remain.
Regulatory Framework and Legislative Amendments
Pursuant to sub-clause 39.2.1.1 of clause 39.2 of Article 39 of the Tax Code of Ukraine:
“Controlled transactions are business transactions of a taxpayer that may affect the object of taxation of corporate income tax of the taxpayer, namely: a) business transactions carried out with non-resident related parties…”
Sub-clause 14.1.159 of clause 14.1 of Article 14 of the Tax Code of Ukraine establishes that related parties are persons between whom relationships may influence the conditions or economic results of their activities.
Effective from 2025, significant amendments were introduced to this sub-clause:
“The supervisory authority, based on audit findings or in court, may prove the relatedness of persons based on facts and circumstances indicating that one legal entity or individual exercised actual control over the business decisions of another legal entity, an unincorporated entity, and/or that the same individual or legal entity exercised actual control over the business decisions of each legal entity and/or unincorporated entity.”
It should be borne in mind that during tax audits, supervisory authorities examine not only the formal corporate ownership structure, but also the factual circumstances of the companies’ operations, the nature of relationships between them, common interests, alignment of conduct, and the ability to exert influence over managerial or commercial decision-making — that is, signs of de facto control.
State Tax Service Tools and Evidentiary Base
The State Tax Service possesses a wide range of instruments to demonstrate de facto relatedness between companies.
Specifically, the State Tax Service may focus on circumstances such as:
- shared commercial brand or trade name usage;
- close corporate and governance ties between the companies (e.g., the director of one company serves as the ultimate beneficial owner of the other);
- recognition of the companies as related parties for transfer pricing purposes through the participation and management influence of a common individual;
- public positioning of the companies as members of a unified business group manufacturing and selling products under a single brand or carrying out adjacent activities;
- long-standing commercial dealings between the entities and economic interdependence of their operations.
Special attention must also be paid to situations where two companies (Ukrainian and foreign) were related parties over a certain period, but due to an ownership change in one of them, the formal criteria of relatedness ceased to apply. Such restructuring can attract heightened scrutiny from tax authorities and prompt in-depth audits to establish whether actual control and de facto relatedness persist.
Below are specific audit procedures and focus areas utilized by the State Tax Service:
The State Tax Service analyzes who actually makes commercial decisions within the companies. Items subject to review include:
- Minutes of shareholder and board meetings.
- Are executive directors, senior managers, and chief accountants different individuals? Did personnel changes occur during the change of owners?
- Contracts executed between the Ukrainian and foreign companies — who signed them, when, and under whose instructions?
- Written correspondence (emails, instant messaging) between management teams of both entities.
- Does the previous owner or associated parties continue to participate de facto in company management?
2. Analysis of Bank Transactions and Financial Flows
- Bank accounts open prior to and following the change of owners — did account credentials, signatories, or authorized persons change?
- Payment chains and settlement dynamics between the companies. Were there delayed payments, debt offsets, or atypical payment terms (particularly when benchmarked against third-party arm’s length transactions)?
3. Analysis of Registration Data and Open-Source IntelligenceShared IP addresses used for tax filing submissions, shared legal and accounting service providers, public registry records, and related digital footprints.
4. Source of Funds of the New ShareholderThe State Tax Service may examine whether the new owner possessed sufficient verified income to acquire the equity stake. If the acquisition took place at nominal value or using capital originating from within the corporate group, it serves as a direct indicator of an artificial transaction.
The tax authorities may recharacterize the change in ownership as sham or executed solely to evade transfer pricing scrutiny.
Risks Associated with Ownership Structure Changes
Furthermore, if business operations commence immediately following an ownership change, the timing correlation between corporate restructuring and trade flows suggests tax planning motives, aligned economic interests, concerted actions of the owners, and ongoing de facto control by the predecessor. In such instances, tax authorities can treat these entities as related parties under the substance-over-form principle.
During an audit, the State Tax Service may seek to prove that real control is exercised not solely via legal ownership of shares, but through the ability to dictate commercial terms, approve critical operational decisions, or act in concert as a unified corporate entity.
Should the volume of transactions between the Ukrainian and foreign companies operating in related or identical sectors exceed the statutory threshold for controlled transactions (UAH 10 million), tax auditors may classify these operations as controlled and require the submission of a Report on Controlled Transactions along with comprehensive Transfer Pricing Documentation.
Considering these factors, businesses must track legislative shifts regarding related-party definitions, perform regular transfer pricing risk assessments, analyze operational linkages, and build an audit-proof file demonstrating that managerial and commercial decisions are made independently by each party.
Judicial Practice Trends and CRS Information Exchange
Court rulings consistently show that formally independent ownership does not refute de facto control. Since 2019–2020, Ukrainian administrative courts and the Supreme Court have increasingly favored the State Tax Service in establishing relatedness through actual economic control.
Key Trends in Court Practice:
- Courts recognize relatedness in the absence of direct corporate ties when sole decision-making by one individual across both entities is evidenced.
- Changes of shareholders or founders shortly before major transactions are frequently deemed “artificial” without genuine transfer of control.
- Email exchanges, identical IP addresses, and common contract signatories serve as sufficient evidence to prove actual control.
When assessing party relatedness, tax inspectors and judges increasingly prioritize the commercial realities of business management over formal legal arrangements.
Through the Common Reporting Standard (CRS) international automatic exchange of financial account information, the State Tax Service routinely obtains access to foreign bank accounts, beneficial owners, corporate holding chains, appointed officers, and cross-border financial activity.
Consequently, a material increase in transaction volumes between companies increases the likelihood that tax authorities will scrutinize the relationship and argue for relatedness or de facto control to reclassify transactions as controlled for transfer pricing purposes.
Audit Invest provides end-to-end support: non-resident transaction screening, Report on Controlled Transactions, and full transfer pricing documentation packages.
