Commercial Cassation Сourt Clarified that Forfeit Calculated in Accordance with Part 2 of Article 785 of the Civil Code of Ukraine Shall not Comprise VAT

In its judgment, upheld by the Resolution of the South-Western Commercial Appellate Court, the Commercial Court of Odessa oblast in the case No 916/1319/19 partly granted the law suit, sought by the Department of Communal Property of Odessa City Council, and charged on the PE «Nobilis Trans Group» arrears of rent, forfeit, fine under Part 2 of Article 785 of the Civil Code of Ukraine and evicted the respondent from the leased non-residential premises.

The local commercial court made its own calculation of the claimed forfeit in the amount of double rate for the period of delay in returning by respondent a non-residential premise from the lease. It made conclusion, agreed by the appellate court, that forfeit in the amount of double rate for the respective period of delay of using the object, stipulated by Part 2 of Article 785 of the Civil Code of Ukraine, is a fine sanction within the meaning of Article 230 of the Commercial Code of Ukraine and in accordance with Articles 185, 188 of the Civil Code of Ukraine shall not be regarded as a subject to VAT, so VAT should not be included in the amount of charged forfeit.

The Supreme Court, composed of the Joint Chamber of the ComCC, upheld the judgments of previous instances as those ruled with the correct application of substantive and procedural law, and formulated the following legal position as to the application of Part 2 of Article 785 of the Civil Code of Ukraine.

Part 2 of Article 785 of the Civil Code of Ukraine is a special provision of civil liability (forfeit), which is determined in the amount of double rate for respective period of delay for return of the object to the lessor in case of lease termination. The forfeit has some specifics as to non-applicable reduced time limits to it in accordance with § 1, part 2 of Article 258 of the Civil Code of Ukraine, as the effect of such a sanction extends to the entire period of misuse of property. The provisions of Article 232 of the Commercial Code of Ukraine as to termination of penalty calculation after 6 months are non-applicable as well, as otherwise is provided by Part 2 of Article 785 of the Civil Code of Ukraine – effective sanction for the respective period of misuse of property.

In accordance with § 188.1 of Article 188 of the Tax Code of Ukraine, forfeit calculation in case of failure to return a leased property (under Part 2 of Article 785 of the Civil Code of Ukraine), if a Lease Agreement is terminated, shall not comprise VAT, which might have been paid by the lessee to the lessor in the case of legitimate use of the property.

More information on the text of the judgment of the Commercial Cassation Сourt within the Supreme Court of November 20, 2020 in the case No. 916/1319/19 is available at: https://reyestr.court.gov.ua/Review/93149464.