Incorrect use of the term “tolling raw materials” in contractual provisions may lead to significant financial risks, particularly tax-related ones. For the application of the provisions of paragraph 32 of subsection 2 of section XX of the Tax Code of Ukraine, the decisive factor is the correct determination of the legal nature of the business transaction.

In particular, for the application of the VAT exemption regime, it is necessary to carry out a “supply of goods” operation within the meaning of subparagraph 14.1.191 of paragraph 14.1 of Article 14 of the Tax Code of Ukraine. Instead, transactions carried out within the framework of relations involving tolling raw materials generally fall under the definition of “supply of services” (subparagraph 14.1.185 of paragraph 14.1 of Article 14 of the Tax Code of Ukraine). In such a case, the VAT exemption regime does not apply, and the relevant transactions are subject to taxation on general grounds.

An analysis of the legal nature of the relevant contracts indicates that, by their substance, they may correspond to the characteristics of a works (contracting) agreement rather than agreements involving tolling raw materials. This conclusion is supported by a combination of legal features, in particular:

• conclusion of the contract within the framework of legal regulation provided for by Article 33 of the Law of Ukraine “On Defense Procurement,” which allows the engagement of subcontractors;
• participation of business entities in the status of co-performers/subcontractors in accordance with paragraph 28 of Article 1 of the said Law;
• production using components owned by the parties, with the emergence of joint ownership of the final result;
• the orientation of the contract toward the performance of work with the transfer of its result to the customer, which corresponds to the substance of a works contract (Article 837 of the Civil Code of Ukraine).

In addition, business transactions that in fact have the characteristics of a supply of goods and are confirmed by relevant primary documents (assembly reports, delivery notes, certificates of acceptance of completed works), on the basis of which the transfer of the right to dispose of the manufactured products takes place, cannot be classified as transactions involving tolling raw materials.

Thus, the proper legal qualification of contractual relations is of decisive importance for the application of the tax regime and makes it possible to avoid unjustified tax liabilities and financial risks.