Criminal Liability for Tax Evasion: Practice, Evidence, and Risks for Business

Criminal Liability for Tax Evasion: Practice, Evidence, and Risks for Business

Criminal proceedings are frequently initiated before, without, or in parallel with tax audits, creating the risk that criminal prosecution becomes a tool of pressure — whether as a standalone process or in combination with a tax dispute.

1. Criminal Prosecution Without a Tax Audit — Real Possibilities and Risks

This is possible:

• Criminal proceedings under Article 212 of the Criminal Code may be opened on the basis of a report, financial monitoring, a complaint, or an analytical product.
• Investigators from the Bureau of Economic Security (BES) are not required to wait for a tax audit to be conducted.

However, it is important to note that during court proceedings:

• The mere fact of non-payment of tax does not constitute a criminal offense.
• The amount of tax debt for criminal qualification purposes is determined solely on the basis of tax audit reports.
• Without a proper tax ruling, it is impossible to prove the "actual failure of funds to reach the budget."

Therefore: criminal prosecution without an audit is possible, but in court it is almost always fragile — which does not, however, spare those involved in such proceedings from a host of problems, ranging from "precautionary" freezing of accounts and searches to the criminal prosecution of executives and owners.

2. How Law Enforcement Uses Tax Authority Materials to Pressure Business

In practice, the BES and other law enforcement bodies:

• use STS summaries, analytical materials, desk audit reports, and internal notes — which are not evidence in criminal proceedings (cases No. 172/1310/23, No. 583/2063/16-к) — yet these are only challenged at the accusation stage during trial;
• file motions with the court for searches and asset freezes, citing analytical materials as evidence, which investigating judges typically grant;
• use these materials to create the appearance of a large-scale violation, even when no agreed tax liabilities exist.

This creates a tool of pressure in the absence of genuine evidence.

The tax authority, in turn, uses criminal proceedings as "evidence" in tax disputes. Specifically, it:

• references the existence of a criminal proceeding;
• attempts to introduce investigative materials, interrogation records, and analytical conclusions from criminal cases;
• asserts that the mere existence of a criminal proceeding constitutes "proof of the fictitious nature of transactions."

In this regard, the Supreme Court in case No. 320/30160/23 states that:

• the existence of a criminal proceeding cannot confirm tax violations;
• materials from criminal proceedings may only have an indirect bearing, but cannot substitute for STS evidence;
• without a guilty verdict, no proven fact of evasion exists.

Sources of Evidence in Criminal Proceedings under Article 212 of the Criminal Code of Ukraine

Admissible sources:

• tax audit reports and tax assessment notices;
• financial documents (contracts, invoices, payment documents);
• accounting registers;
• expert examinations (provided they are properly commissioned);
• witness testimony, but only where it directly proves intent.

Inadmissible sources:

• analytical studies by the STS or BES;
• generalized conclusions regarding counterparties being "transit" entities;
• reports without a defined methodology;
• assumptions about tax minimization schemes.

In court proceedings on charges under Article 212 of the Criminal Code, the determination of intent and the amount of unpaid taxes must be based on proper financial documents, not on analytical assumptions.

Distinguishing Between an Administrative Dispute and Criminal Proceedings

Administrative and criminal liability have different legal natures in terms of the subject matter of proof. The Supreme Court, in numerous decisions, emphasizes that a tax violation consisting of improper record-keeping, incorrect formation of expenses, errors in primary documents, or the questionable nature of counterparties does not in itself constitute a criminal offense under Article 212 of the Criminal Code of Ukraine.

A criminal offense requires:

• an act that produces a result — non-payment of taxes in a significant/large/especially large amount;
• a causal link between the act and the non-payment;
• a form of fault — intent (direct or indirect).

Errors, negligence, carelessness, poor organization of accounting, and staffing miscalculations do not give rise to criminal liability. The Supreme Court emphasizes: even where a tax authority identifies a violation, the mere fact of additional tax assessments does not automatically imply the existence of a crime.

Key Point: Criminal Liability for Taxes Is Only Possible Where There Is Intent

Intent is a mandatory element of the offense under Article 212 of the Criminal Code of Ukraine. This means that law enforcement must prove that the official:

1. was aware of the unlawful nature of the tax minimization schemes created;
2. anticipated the consequences in the form of tax non-payment;
3. desired or consciously allowed those consequences to occur;
4. carried out specific actions aimed at minimizing the tax burden through unlawful means.

The Supreme Court expressly states: there can be no intent if a person acted on the basis of primary documents that formally comply with legal requirements, or relied on verified information from counterparties (registration in the Unified State Register, VAT payer status, possession of licenses, actual delivery of goods). There can be no intent if there is a justified economic rationale for the transactions, and deficiencies in documentation do not alter the reality of the business operation.

3. The Supreme Court: Intent Must Be Proven Documentarily, Not by Assumption

Evidence of intent is not the same as evidence of a tax violation. Establishing the fact of a violation requires tax audit documents. Establishing intent requires more.

The following types of evidence are needed:

• correspondence discussing a minimization scheme;
• instructions from management to accountants or contractors;
• testimony of participants in the "scheme";
• internal company documents directly indicating fictitious transactions;
• forged documents, signatures, or seals;
• control over the movement of non-commodity transactions;
• coordinated actions with "fictitious" counterparties.

The Supreme Court has repeatedly emphasized:

• Tax authority conclusions regarding the "unreality of transactions" do not in themselves prove intent to evade taxes.
• Even materials from criminal proceedings referenced by the tax authority in an administrative dispute cannot substitute for full proof of intent if they do not contain clear, procedurally admissible evidence.

Courts frequently point to:

• formal references to covert investigative activity (NSRD) materials;
• extraction of "operational information" from criminal proceedings that does not constitute evidence;
• shifting the burden of proof onto the taxpayer;
• automatic linking of additional tax assessments to criminal intent.

A tax violation becomes a criminal offense only when there is documentary evidence of intent to evade taxes. It must be proven that:

• taxes were not paid in large amounts;
• there is a causal link between the actions and the non-payment;
• the evasion was conscious and deliberate.

How does this work in practice?

1. If there are errors or deficiencies in documents — it is a tax dispute, not a criminal matter.
2. If a business transaction exists, even if imperfectly documented — there is no intent.
3. If there is no evidence of deliberate acts of evasion — the criminal case should be closed.

Senior Management as Real Potential Targets

As noted above, law enforcement:

• frequently opens criminal proceedings on a purely formal basis — on the strength of a tax audit report or BES "analytics" alone;
• employs criminal tools (searches, seizures, account freezes, summons to interrogation) before any intent has been established;
• shifts focus from the company to its leadership: the director, CFO, and chief accountant automatically become "potential suspects."

In other words: criminal risks arise before the elements of the offense have been proven.

Senior Management as Investigative "Targets": Why Them?

Law enforcement proceeds from the presumption that:

1. All company activities occur under management's control — therefore, if there are tax violations, the director knew.
2. Signatures on primary documents equal involvement in evasion — even without analysis of economic motives or the reality of transactions.
3. The mere fact of holding a position means "they could, they should have, and therefore acted intentionally."

This is a logic the Supreme Court has repeatedly criticized:

• a manager is not obliged to vet a counterparty beyond what the law requires;
• the existence of primary documents and the movement of goods/services undermines the argument of intent;
• there is no "automatic guilt" of management — everything must be proven.

Where Criminal Risks for Senior Management Actually Arise

1. Working with problematic counterparties ("risky," "fictitious," "lacking resources") — although the mere fact of cooperating with such a counterparty is not a crime, pre-trial investigation bodies often treat it as an indication of intent.

Risk is reduced if:

• documents establishing a business purpose have been collected;
• there is actual movement of goods/services;
• the reality of the transactions has been established.

2. Tax planning without documenting a justified economic purpose — without proper internal documentation, any "optimization" may be perceived as evasion.
3. Failure to document management decisions — if investigators cannot see internal memos, economists'/lawyers' explanations, or compliance decisions, it becomes easier for them to characterize management's actions as a "scheme."
4. Conflicts with tax authorities and large additional assessments — after an audit report and tax assessment notice are issued, the tax authority refers materials to the BES or police, and the investigator opens criminal proceedings without any evidence of intent. This is a systemic practice that the Supreme Court criticizes, but which does not prevent law enforcement from continuing to apply it.

How Law Enforcement Attempts to "Construct Intent"

The Supreme Court, across various decisions, notes that investigators most commonly employ the following steps:

1. Formal reference to a tax audit report — although the report does not prove intent, investigators present it as the basis for criminal proceedings.
2. Use of BES and tax authority analytical reports — these documents are not evidence, yet they are manipulated as "established facts."
3. Reference to materials from criminal proceedings against counterparties — even where the company's management had no connection to those proceedings.
4. "Psychological pressure": suspicion based on official position — the logic being: "if the director signed the documents, they knew."

The Supreme Court systematically rejects this approach: it is necessary to prove not merely the fact of signing, but also awareness of the unlawfulness of the actions, the direction of intent toward a specific criminal result, and conscious awareness of that result.

Persons Who Come Under Suspicion First:

• the director (especially if they sign financial statements);
• the CFO;
• the chief accountant;
• the head of the procurement/sales division;
• the owner, where there are indications of de facto management.

The reasons: these individuals are the signatories of tax returns; law enforcement regards them as "beneficiaries" of the scheme; and it is easier to justify "intent" through their corporate roles.

Conclusions

1. Criminal proceedings without a tax audit are primarily a tool of pressure, but can lead to criminal prosecution (albeit with difficulties for the prosecution in court). Proving charges under Article 212 of the Criminal Code requires genuine documents and agreed tax liabilities.
2. Law enforcement actively uses STS materials as grounds for searches and freezes, although the Supreme Court emphasizes that such materials frequently do not constitute evidence.
3. The tax authority, in turn, attempts to use criminal proceedings as an argument in tax disputes. The Supreme Court has clearly prohibited the substitution of evidence with references to a criminal case in the absence of a verdict.
4. The primary targets of risk are the director, the accountant, and senior management — but actual prosecution is only possible where proven intent exists.