The Supreme Court Clarifies the Rule for Writing Off Tax Debt

For many years, tax debt write-offs in personal insolvency proceedings were largely treated as a formal exercise. If the debt had arisen within three years before the opening of insolvency proceedings, courts often considered it eligible for write-off under Part 2 of Article 125 of the Code of Ukraine on Bankruptcy Procedures.

The Supreme Court’s ruling of 27 May 2026 in case No. 908/1194/24 significantly changes this approach. The Court held that the three-year period is only one of several conditions and does not automatically entitle a debtor to have tax debt written off.

Background of the dispute

In insolvency proceedings involving an individual entrepreneur, the tax authority submitted claims exceeding UAH 1.85 million. The restructuring manager asked the commercial court to recognise the tax debt as bad debt and write it off.

Both the first-instance and appellate courts agreed, concluding that the debt had arisen within the statutory three-year period. Following the write-off, the insolvency proceedings were closed.

The tax authority challenged those decisions before the Supreme Court, which set them aside and returned the case for a new hearing at the restructuring stage.

The Supreme Court’s key conclusions

The Court criticised the lower courts for focusing solely on the age of the debt. It stressed that Article 125 does not establish an automatic mechanism for terminating tax obligations but must be applied together with the Tax Code of Ukraine and only after all requirements of the insolvency procedure have been satisfied.

A crucial distinction was drawn between a tax liability and tax debt. Under the Tax Code, tax debt arises only after a monetary liability becomes agreed, the statutory payment period expires, and the taxpayer fails to pay. Consequently, the three-year period should be calculated from the first day of default rather than from the date of a tax assessment notice.

Three years alone are insufficient

The Supreme Court confirmed that satisfying the three-year criterion is not enough to justify write-off.

Before granting such relief, the commercial court must determine:

• whether tax debt actually exists under the Tax Code;
• when it legally arose;
• whether it falls within the three-year period;
• the debtor’s actual financial position;
• whether the restructuring procedure was properly conducted; and
• whether the debtor acted in good faith.

The Court therefore shifted the emphasis from a purely formal assessment of dates to a comprehensive review of the insolvency process.

Good faith as a decisive factor

The ruling highlights that the insolvency system is intended to protect honest debtors rather than provide an easy mechanism for avoiding tax obligations.

Debtors must fully disclose their assets, income and financial transactions, while restructuring managers must verify that information and report any inconsistencies.

If the debtor’s financial situation and conduct have not been thoroughly examined, tax debt cannot be written off, even if the three-year requirement is met.

The restructuring procedure remains essential

The Supreme Court clarified that approval of a restructuring plan is not an absolute prerequisite for writing off tax debt.

Nevertheless, the court cannot separate the write-off from the restructuring process itself. It must assess declarations, inventory results, reports of the restructuring manager, creditors’ participation and other mandatory procedural elements. Otherwise, insolvency proceedings would become a purely technical mechanism for eliminating tax liabilities.

Interaction between bankruptcy law and tax law

The ruling confirms that both the Code of Ukraine on Bankruptcy Procedures and the Tax Code must be applied together.

The Bankruptcy Code governs the treatment of creditors' claims within insolvency proceedings, while the Tax Code determines when a tax liability becomes agreed and when tax debt legally arises.

The Supreme Court also noted that the Ministry of Finance’s Procedure for Writing Off Bad Tax Debt regulates only the technical implementation of a court decision and cannot replace judicial determination of whether statutory grounds for write-off exist.

Practical implications

For debtors, the decision means that insolvency strategies can no longer rely solely on the age of tax debt. They must be prepared to demonstrate genuine insolvency, complete financial transparency and good-faith conduct throughout the proceedings.

For tax authorities, the ruling strengthens their ability to challenge write-offs by scrutinising the debtor’s financial position, declarations and procedural conduct.

Conclusion

The Supreme Court did not eliminate the possibility of writing off tax debt in insolvency proceedings. Instead, it established that such relief is available only after a comprehensive examination of the debtor’s financial circumstances, the legal nature of the debt and the integrity of the restructuring procedure.

The three-year rule remains relevant, but it is no longer sufficient on its own. The decisive factors are the proper application of both bankruptcy and tax legislation, the debtor’s good faith and the court’s assessment of all relevant circumstances.