Tax Obligations in Bankruptcy Proceedings

Tax debts are among the most sensitive issues in insolvency cases. For businesses, they can determine survival; for the state, they safeguard fiscal stability. Once a company enters bankruptcy proceedings, the tax authority becomes a creditor with a special status: its claims enjoy priority, but they are also subject to strict limitations set by the Ukrainian Code of Bankruptcy Procedures (CUBP).

Which taxes are covered in bankruptcy

All tax liabilities that arose before the date of the bankruptcy filing are considered competitive (register) claims. This includes:

• corporate income tax;
• value-added tax (VAT);
• local taxes and fees such as land tax, real estate tax, and environmental charges;
• payroll-related taxes — Unified Social Contribution (USC) and personal income tax (PIT).

Any liabilities that arise after the filing are deemed current obligations. They must be paid on time despite the moratorium. Failure to pay current taxes is a red flag for the court and creditors, often signaling that restructuring is unrealistic.

The moratorium: what is frozen and what is not

The moratorium is designed to “freeze” the situation and ensure fair distribution among all creditors.

• No penalties or interest are accrued on pre-petition tax debts.
• The tax debt is fixed as of the date of bankruptcy filing.
• The tax authority is barred from enforcing collection through asset seizures, bank account arrests, or similar measures.

However:

• the debtor must continue to pay all new tax liabilities (for example, VAT on new transactions or payroll taxes during the procedure).

Priority of claims

The CUBP defines a strict hierarchy of creditors. For taxes, the priority is as follows:

1. First priority — employee claims, including wages and compensation for harm to life and health.
2. Second priority — tax debts and other mandatory budget payments.
3. Subsequent priorities — ordinary unsecured creditors.
4. Last priority — fines, penalties, and financial sanctions.

This means the state ranks above most creditors, though still below employees. In practice, fiscal penalties and interest are rarely satisfied and often written off due to insufficient assets.

Case law from 2024–2025

Recent rulings of the Supreme Court of Ukraine have clarified the treatment of tax claims:

• SC, 17 January 2024, Case No. 903/51/20. A tax obligation arises from the first day of payment default, not from the date of the tax authority’s notice. This means even contested assessments qualify as competitive claims.
• SC, 22 May 2024, Case No. 910/13514/21. The tax authority may file claims in bankruptcy regardless of pending administrative litigation, ensuring the state’s share in the liquidation estate.
• Practice in 2025. Amendments to the CUBP now require that all tax disputes of the debtor be resolved within the bankruptcy proceedings themselves, not in administrative courts. This eliminates jurisdictional conflicts and provides more predictability.

Practical implications for businesses

Tax obligations in bankruptcy are not just “debts to the state.” They shape the entire course of the case:

• Restructuring prospects. If current taxes remain unpaid, the debtor is seen as non-viable.
• Distribution outcomes. Tax authorities compete with other creditors but enjoy higher priority.
• Relief on penalties. While fines and penalties may be written off, principal tax debts remain binding.

Conclusion

Tax obligations are at the heart of Ukraine’s insolvency system. For the state, they ensure budgetary inflows; for businesses, they serve as a litmus test of viability.

For insolvency practitioners, arbitration managers, and debtors themselves, it is crucial to understand:

• which obligations form part of the register of claims;
• which taxes must be paid as current;
• how courts interpret the moment when tax debts arise.

A well-planned strategy for handling tax claims can define the outcome of bankruptcy — from successful restructuring to full debt discharge in liquidation.