On the invalidity of transactions on claims of tax authorities

Civil legislation, defining the grounds for the invalidity of transactions, classically proceeds from four groups of transaction defects:

vices of the will,

vices of the content,

defects of form,

vices of the subject composition.

Paragraph 2 of Article 157 of the Civil Code of the Republic of Kazakhstan (hereinafter referred to as the Civil Code of the Republic of Kazakhstan) establishes that "A transaction is recognized as invalid if the requirements for the form, content and participants of the transaction, as well as for the freedom of their will, are violated on the grounds established by this Code or other legislative acts."

In principle, the general grounds for the invalidity of transactions are given in Articles 157, 158-160 of the Civil Code of the Republic of Kazakhstan, which do not exclude special grounds contained in other legislative acts (for example, bankruptcy grounds for invalidity, etc.).

As follows from the provisions of Article 157 of the Civil Code of the Republic of Kazakhstan, invalid transactions are of two types:

insignificant – not generating initially legal consequences and not requiring the court to establish their invalidity, and

disputed – the invalidity of which must be established in court. A fairly small group of grounds for invalidity leads to the nullity of the transaction.

Insignificance is possible only when the law explicitly provides for such a consequence, in other cases the vices are disputable. And this is correct, since the presumption of invalidity creates great risks in terms of legal uncertainty and can negatively affect civil turnover.

Actually, therefore, for a number of reasons (in particular, for the vices of the will), a special shortened limitation period is provided – 1 year "from the date of cessation of violence or threat, under the influence of which the transaction was made, or from the day when the plaintiff learned or should have learned about other circumstances that are the basis for declaring the transaction invalid" (paragraph 2 of Article 162 of the Civil Code of the Republic of Kazakhstan).

Turnover stability is the basis of a favorable business climate and economic stability, a guarantee of principles such as the protection of civil rights, their unhindered exercise, freedom of contract and non-interference of the state in private affairs.

That is why interested persons can file relevant claims for invalidation of the transaction – persons with respect to whose rights and obligations changes have occurred in connection with a concluded transaction containing certain defects, namely, "whose rights and legitimate interests have been violated or may be violated as a result of the transaction" (paragraph 2 of paragraph 3 of Article 157 Civil Code of the Republic of Kazakhstan).

And even this circle is limited through an indication of good faith. Thus, "a person who intentionally concluded a transaction that violates the requirements of the legislation of the Republic of Kazakhstan, the charter of a legal entity or the competence of its bodies cannot demand that a transaction be declared invalid if such a requirement is caused by selfish motives or the intention to evade responsibility" (paragraph 3 of Article 158 of the Civil Code of the Republic of Kazakhstan).

This provision corresponds to the principles of good faith, reasonableness and fairness, as well as the provisions of paragraph 7 of Article 8 of the Civil Code of the Republic of Kazakhstan on denial of protection to a person who abuses his civil rights.

Civil legislation, through the institution of invalidity of a transaction, protects the rights and legitimate interests of subjects of civil rights on the one hand, and ensures compliance with law and order by defining illegal transactions as invalid on the other.

Not all of them are initially insignificant (such transactions include transactions with a criminal purpose), but their invalidity can "catch up" with the claims of interested parties, appropriate government agencies or the prosecutor within the limitation period.

The Law establishes the following as grounds for the invalidity of illegal transactions::

1) transactions aimed at achieving a criminal goal, the illegality of which is established by a court verdict (resolution) (paragraph 2 of Article 158 of the Civil Code of the Republic of Kazakhstan);

2) transactions that do not comply with the requirements of the law and contradict the principles of law and order (paragraph 1 of Article 158 of the Civil Code of the Republic of Kazakhstan);

3) transactions concluded with the intention of evading obligations or liability to a third party or the state (paragraph 4 of Article 158 of the Civil Code of the Republic of Kazakhstan).

In addition, imaginary transactions – "committed only for appearance, without the intention to create appropriate legal consequences" - can also be declared invalid by a court "at the request of an interested person, an appropriate government agency or a prosecutor" (paragraph 1 of Article 160 of the Civil Code of the Republic of Kazakhstan).

And if transactions with a criminal purpose are null and void, then the rest are contested and their invalidity must be established by a court in civil proceedings.

Transactions concluded with the intention of evading an obligation or liability

Recently, entrepreneurs' transactions have been increasingly challenged in courts on the grounds defined in paragraph 4 of Article 158 of the Civil Code of the Republic of Kazakhstan – transactions concluded with the intention of evading obligations or liability to a third party or the state and paragraph 1 of Article 160 of the Civil Code of the Republic of Kazakhstan – imaginary transactions.

The plaintiffs in this category of disputes may also be the State, represented by a proper government agency.

In practice, such lawsuits are increasingly filed in the interests of the state by tax authorities, which in the vast majority of cases are satisfied by the courts, and every year the number of contested transactions grows almost twice annually, which adversely affects the stability of civil turnover and the interests of bona fide participants in civil turnover.

It is important to understand that the invalidity of transactions can be established by a court on the grounds specified in paragraph 1 of Article 158 of the Civil Code of the Republic of Kazakhstan only if "the other participant in the transaction knew or should have known" about the intention of the first to evade obligations and responsibilities, and on the grounds specified in paragraph 1 of Article 160 of the Civil Code of the Republic of Kazakhstan – if not simply absent actual execution, but also proven lack of intent on the part of the parties to the transaction (all) the legal effect of it.

Thus, the Regulatory Resolution of the Supreme Court of the Republic of Kazakhstan dated July 7, 2016 No. 6 "On certain issues of invalidity of transactions and the application by courts of the consequences of their invalidity" defines that "The absence of the will of the parties to the transaction for the occurrence of certain legal consequences, which may be confirmed by the presence or absence of certain actions (inaction) the parties and other evidence in the case (for example, the absence of a transfer of property, etc.) entails the invalidity (nullity) of imaginary transactions."

That is, the law protects a bona fide participant in the transaction, and good faith is presumed, which means that the burden of proving bad faith is on the plaintiff.

In accordance with subparagraph 10) of paragraph 1 of Article 19 of the Code of the Republic of Kazakhstan "On Taxes and Other Mandatory Payments to the Budget (Tax Code)" dated December 25, 2017 No. 120-VI SAM (hereinafter referred to as the Tax Code of the Republic of Kazakhstan), tax authorities have the right to file lawsuits with the courts for invalidation of transactions ..., but when implemented by tax authorities the bodies of such law have problems in practice.

As Zh.K. Seidalina notes: "the right of filing lawsuits by tax authorities to invalidate transactions between taxpayers and "jamming" into civil circulation should be investigated through the prism of establishing the reasons, conditions and the need for a legislator to grant a state body such a right."

Thus, the tax authorities cannot use this right as a tool of tax administration, because this is not only a gross, but also an unfair interference in turnover, which is a vivid example of abuse of the right, and in the context under consideration, its powers.

On the other hand, there are also problems related to the evidence, or rather, the lack of evidence of the orientation of transactions contested by the tax authorities to evade obligations and responsibilities, as well as the evidence / lack of evidence of the fact of dishonesty of the second participant in the transaction.

The plaintiffs do not submit sufficient evidence to the court establishing the above circumstances (and sometimes they do not even submit inspection reports, because inspections most likely have not even been conducted).

Civil law establishes the presumption of good faith of participants in civil turnover and subjects of civil rights, which means that a person is in good faith until his bad faith is proven and the burden of proving the bad faith of the participant in the transaction is on the party referring to such a circumstance.

In practice, another trend has developed – the parties to the transaction themselves bear the burden of proving their good faith and more often to no avail. According to the Regulatory Resolution of the Supreme Court of the Republic of Kazakhstan dated December 22, 2022 No. 9 "On certain issues of application of tax legislation by courts":

"The collection of evidence is carried out by the tax authority in accordance with its competence, within the framework of tax administration, including through tax control (in the form of a tax audit and other forms of state control), preceding the filing of a lawsuit to declare the transaction invalid."

Thus, the filing of a claim must be preceded by tax audits and other forms of state control, reflected in the relevant acts of tax administration. A subject under tax control has the right to challenge such an act within the framework of administrative procedures.

Thus, the court's act in the framework of administrative proceedings on such disputes should be of a prejudicial nature for courts conducting civil proceedings on claims for invalidation of the transaction.

In the opposite cases, when there is a judicial act of the civil court that has entered into force at the time of the dispute over the recognition of illegal acts of the tax authority that caused the transaction to be declared invalid, prejudice may hinder the implementation of the principle of the active role of the court in administrative proceedings.

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