Proving Business Transactions Are Real in a Dispute with the DPS

When a tax authority disallows expenses or an input VAT credit with the wording “the transaction had no real character,” the dispute shifts onto a single question of proof: was there an actual movement of assets, or not? The party that wins is not the one with the prettiest paperwork, but the one who can show the full life cycle of the transaction — from the contract to the moment the acquired asset is used in the taxpayer’s own business. Writing as a forensic economic expert, I explain which documents and evidence carry that burden in a dispute with the State Tax Service of Ukraine (DPS).

What the “reality” of a transaction means: substance, movement of assets, business purpose

The term “reality” — in practice also called “substance” or “товарність” — means that a business transaction was not merely documented but actually took place: assets genuinely moved, changing the property position of the parties. The Law of Ukraine “On Accounting and Financial Reporting” defines a business transaction as an action or event that causes changes in the assets, liabilities or equity of an enterprise. If no such change occurred, then even a flawlessly completed document does not turn a fiction into a transaction.

In reality disputes, courts and experts effectively test three criteria:

• actual movement of assets — goods were truly delivered, work performed, a service rendered, not merely an invoice issued;
• business purpose — the transaction has a reasonable economic cause and does not exist solely to obtain a tax benefit;
• connection with business activity — what was acquired is used (or intended for use) in the taxpayer’s own operations.

The DPS position and the taxpayer’s defence are both built on these three pillars. What follows is the evidence that fills them.

The complete package of primary documents

Reality is proven not by one document but by a body of documents that reflects the movement of an asset at every stage. A gap in that chain is the first thing an audit seizes on. The optimal package looks like this:

Stage of the transaction	Documents
Agreement	Contract, specifications, amendments, commercial offers
Handover of goods / works	Delivery note (видаткова накладна), acceptance act, act of completed works (services rendered)
Transport	Consignment note (товарно-транспортна накладна, TTN), waybills, carriage contract, power of attorney to receive goods
Receipt and storage	Goods-received orders, warehouse stock cards, stock-balance data
Settlement	Payment instructions, bank statements
Recording in the books	Accounting registers, tax (VAT) invoices, reporting
Quality and origin (where relevant)	Certificates of conformity, quality passports, permits

A few practical emphases.

The TTN and evidence of transport

A missing or defective consignment note (TTN) does not by itself make a transaction unreal — this document exists primarily to account for the work of road transport and is not the sole proof that title passed. But when the case concerns supply of goods that physically must be moved, the absence of any transport evidence at all (TTN, route, driver and vehicle data) sharply weakens the position. An audit will inevitably ask: how exactly did the goods get from seller to buyer?

Acts of completed work and services

Services are the most vulnerable category, because they leave no physical trace. Here, detailed acts (what precisely was done, in what volume) are especially important, together with proof of the result: reports, calculations, finished products in which the work or service was used.

Use in the taxpayer’s own activity

This is what taxpayers most often under-document. It is not enough to show that goods arrived — you must demonstrate their onward fate: write-off into production (costings, write-off acts, consumption norms) or subsequent resale (delivery notes, contracts with buyers). It is precisely the link “acquired → used or sold” that closes the question of business purpose.

Individual liability: the taxpayer is not answerable for the counterparty

A cornerstone of the defence is the individual character of legal liability. Article 61 of the Constitution of Ukraine expressly establishes that a person’s legal liability is individual in nature. In tax terms this means: if your supplier failed to declare VAT, lacks “sufficient resources,” filed no reporting, or appears in a supply-chain “break,” that is his violation — not automatically yours.

Judicial practice consistently confirms this logic. The Grand Chamber of the Supreme Court has stressed in its rulings that a taxpayer cannot bear liability for the unlawful acts of counterparties where the taxpayer itself met all statutory conditions for forming expenses and an input VAT credit and holds properly executed primary documents. There is no provision in current legislation that would allow a taxpayer to be “punished” for another party’s violations without examining the taxpayer’s own transactions.

Two further safeguards reinforce this position:

• the presumption of lawfulness of the taxpayer’s decisions (subclause 4.1.4 of Article 4 of the Tax Code of Ukraine, PKU): where a rule admits an ambiguous reading, the decision is made in the taxpayer’s favour;
• the burden of proof in an administrative dispute: under the Code of Administrative Procedure (KAS), the duty to prove the lawfulness of its decision rests on the authority — that is, on the tax body (part two of Article 77 of the KAS).

But this is no indulgence. If the authority proves that the transaction objectively did not occur — the goods moved nowhere, the supplier physically could not have delivered them, and the money returned in a loop — the right to a credit and expenses is genuinely lost. The essence of the defence, therefore, is not to criticise the DPS position but to positively prove the real movement of assets.

Resources, personnel and the parties’ capacity to perform

A separate block of evidence concerns the objective capacity of the parties to carry out the transaction. Audits often build a finding of unreality precisely on the claim that the counterparty “had no resources” — no employees, warehouses, transport or fixed assets. It is therefore useful to have arguments ready about the existence of:

• personnel of the appropriate qualification;
• production, warehousing or trading capacity, transport, or engaged subcontractors;
• the assets needed for this specific transaction.

Importantly, a counterparty’s lack of its own resources does not always mean incapacity — it may have engaged them under lease, carriage or subcontract agreements. But then it is advisable to have traces of such interaction. The better you can explain the “physics” of the transaction — who performed it, with what, and how — the stronger the position.

Typical evidence of “unreality” the DPS relies on

To prepare a defence you must understand the audit’s arsenal. Most often it consists of:

• a VAT supply-chain “break” — where tax information does not reconcile along the chain of suppliers;
• counterparty defects — absence at its registered address, lack of resources and personnel, a “mass” director, existing criminal proceedings or adverse tax information;
• defects or contradictions in primary documents — unfilled requisites, discrepancies in dates, quantities or signatures;
• absence of evidence of transport and storage;
• circular flow of funds — payment returning to the initiator through a chain of persons.

The key point to remember: most of these indicators relate to the counterparty or to the chain in general, not to your specific transaction. On their own, without proof that your particular transaction was unreal, they are not conclusive evidence — and this is where the defence is built.

The role of forensic economic expertise (specialty 11.1)

This is where forensic economic expertise enters. The study of accounting, tax-accounting and reporting documents is forensic specialty 11.1. A forensic expert does not decide the legal question and does not establish guilt (that is the court’s competence) — the expert establishes facts of an economic nature:

• whether the documents provided confirm the movement of goods, funds, works and services;
• whether the transaction is recorded in accounting and tax records and reporting, and whether primary documents, registers and returns reconcile;
• whether the link between the acquisition and its later use or resale can be traced.

In essence, expertise turns a scattered “pile of documents” into a methodically built picture of asset movement that a court finds hard to dismiss. This is especially valuable when the DPS operates with general wording while the business responds with concrete figures and documents. Decisive here is a correctly framed question: not “was the transaction fictitious” (a legal characterisation, not for an expert), but “are the business transactions between Enterprise A and Counterparty B for such-and-such period confirmed by documents and accounting data.” The expert’s work is governed by the Law of Ukraine “On Forensic Expert Activity” and by Ministry of Justice Instruction No. 53/5.

In practice, a sound strategy is to begin with a pre-trial expert study already at the stage of appeal or claim preparation: it helps to soberly assess the position, find gaps in the documents before trial, strengthen the evidence base, and — where needed — properly formulate the questions for a court-appointed expert examination.

Common taxpayer mistakes

• An incomplete document package — there is a delivery note, but no TTN, no acts, no proof of payment or of use.
• A broken chain of evidence — the arrival of goods is shown, but their onward movement is not.
• No transport evidence where the goods physically had to be moved.
• Missing certificates or permits for goods that require them.
• Defending by mere “criticism” of the DPS position instead of positively proving reality.
• Turning to expertise too late — once part of the documents is already lost and appeal deadlines are running out.

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If your transactions are alleged to be unreal, the essential thing is to gather — in good time and systematically — the evidence of asset movement and its correct reflection in the accounts. I would be glad to help with a consultation or by conducting a forensic economic examination, so that your position rests not on general arguments but on methodically confirmed facts.