Business Property Destroyed by Shelling: How to Report the Losses and What Will Happen with Taxes

Russian shelling can destroy not only business property but also the documents needed to keep track of it. We’ll explain how to properly document losses, write off destroyed property, and what tax implications this has for a business.

How to Document the Destruction or Damage of Property Following Shelling

If a company’s property is damaged or destroyed as a result of shelling, it is important to document not only the damage itself but also its cause. The State Tax Service explicitly states that writing off destroyed goods, inventory, and fixed assets requires proper documentary evidence.

The law does not specify a single document that would be suitable for all cases. Among the possible forms of evidence, the State Tax Service lists a fire or damage report, an extract from the Unified Register of Pre-trial Investigations regarding the shelling incident, documents from the Chamber of Commerce and Industry, and other documents confirming the fact and causes of the property’s destruction. Therefore, following a shelling incident, a business should ensure that the event is officially documented by the relevant authorities and retain the documents received.

If a fire broke out as a result of the attack, a fire report may serve as evidence. It is drawn up by an authorized official of the State Emergency Service based on the results of an inspection of the fire scene and taking into account information provided by the owner of the affected property or their representative. As a general rule, the report must be prepared no later than 24 hours after the fire has been extinguished or reported. However, during a state of war or a state of emergency, if there are sufficient grounds, the report may be prepared within one month from the date the fire was reported or a written application was submitted.

If information regarding shelling and property damage has been entered into the Unified Register of Pre-trial Investigations (URPI), the company should obtain an extract from the register.

It is important to understand that not all of the documents listed by the State Tax Service are required simultaneously to confirm the losses. The specific set of documents depends on the circumstances of the destruction or damage to the property.

It is also important to distinguish between documenting the fact of destruction and determining the amount of losses. A special methodology developed by the Ministry of Economy and the State Property Fund is in place to assess business losses resulting from Russian aggression. This methodology allows for the determination of actual losses from the loss, destruction, or damage to property, lost profits, and restoration needs. As a general rule, actual damages resulting from damage to or destruction of property are determined by comparing its value before and after the damage occurred. This assessment is conducted according to specifically established rules and should not be confused with the initial documentation of the fact of destruction itself.

Inventory and Write-Off: What a Company Must Do

Once the company has documented the consequences of the shelling, an inventory must be conducted to write off the destroyed property. The procedure for conducting the inventory is set forth in Ministry of Finance Regulation No. 879.

To conduct the inventory, the company’s director establishes an inventory commission by written order. The commission may include representatives of management, the accounting department, and employees who are familiar with the relevant property—for example, engineers, mechanics, commodity experts, or other specialists. The commission must determine the actual presence and condition of the assets and compare the data obtained with the accounting records. For inventory, this involves physically counting, weighing, or measuring the items—it is not permissible to simply transfer figures from the accounting records to the documents or to record balances based on the verbal reports of the person responsible for the assets.

Inventory documents are signed by the commission members and the persons responsible for the assets. Inventory records are prepared in at least two copies.

If only part of the enterprise’s property has been damaged or destroyed, it is not necessary to conduct an inventory of all its assets. The scope of the inventory is determined by the manager. For example, following a localized strike, it may cover the property of a specific warehouse, damaged equipment, or a particular batch of goods.

An important wartime consideration applies to situations where it is dangerous or physically impossible to reach a destroyed enterprise. For enterprises and their property in combat zones, Regulation No. 879 permits conducting an inventory once safe and unimpeded access to the assets and necessary documents becomes possible. Once the obstacles have been removed, the inventory must be taken as of the first day of the month following the month in which access became possible, and its results must be reflected in the accounting records for the corresponding reporting period.

Based on the results of the inventory count, the company obtains the documentary basis for recording the loss of assets in its accounting records.

Destroyed Goods and Inventories: How to Write Them Off and What Happens to Income Tax

If, as a result of shelling, a company has lost goods, raw materials, supplies, finished products, or other inventory, their value—after the write-off has been properly documented—is recorded as an expense in accordance with accounting rules. In practice, this means that the value of the written-off inventory reduces the company’s pre-tax financial result and, consequently, its income tax base.

For example, if a batch of goods valued at 500,000 hryvnias—which the company had recorded on its books—was destroyed by a direct hit, after the write-off is properly documented, this value is recognized as an expense in the accounting records. If there are no other circumstances affecting the calculation, the pre-tax financial result will be reduced by the corresponding amount as a result. This does not mean that the government will refund 500,000 hryvnias to the company: it merely refers to a reduction in the financial result used to determine the income tax liability.

There is another nuance for companies that do not have access to their inventory due to hostilities. The mere inability to access, for example, a warehouse located in a combat zone does not in itself mean that the goods can be written off as destroyed. Until it becomes possible to conduct an inventory and document the loss, such inventory continues to be recorded as part of the company’s assets.

Destroyed Buildings, Equipment, and Vehicles: How Fixed Assets Are Written Off

For fixed assets—buildings, equipment, vehicles, and other property that a company has used for an extended period—the rules differ from those for writing off goods and inventory. After the destroyed asset is disposed of, its residual value is written off, and the tax consequences depend on whether the company applies financial result adjustments for differences as provided for by the Tax Code.

For a company that does not apply tax adjustments, the value of the destroyed fixed asset is written off in accordance with accounting rules. Its residual value is included in expenses and reduces the amount used to calculate income tax. Enterprises whose annual income does not exceed 40 million hryvnias have the right not to apply most tax adjustments, provided they have adopted a corresponding resolution.

For businesses that apply tax adjustments, the rule is different. In such cases, the accounting and tax residual values of a fixed asset may differ. Therefore, when calculating tax, the accounting residual value of the destroyed asset is replaced with the tax residual value. It is the tax book value of the destroyed fixed asset that reduces the tax base used to calculate income tax.

Is VAT due on destroyed property?

To understand why the issue of VAT even arises after property is destroyed, it’s worth briefly explaining how this tax works. For example, a company purchases a chair for its operations for 100 hryvnias plus 20 hryvnias in VAT and pays the seller the full 120 hryvnias. Under the conditions provided by law, the company includes these 20 hryvnias in its tax credit. This reduces the total amount of VAT the company must pay to the government based on its business results. It is not necessary to sell this specific chair for this purpose.

For example, if over a certain period a business charged customers 1,000 hryvnias in VAT and, when purchasing goods and property for its operations, became entitled to a 250-hryvnia tax credit, then, in simple terms, it would owe the government 750 hryvnias. In other words, the tax credit yields a very real benefit, even though the company may use the purchased items for its own purposes rather than reselling them.

If property purchased subject to VAT is destroyed, the question arises as to whether the business must compensate for the tax credit it has already claimed. For property destroyed or lost due to force majeure during a state of war or a state of emergency, a special rule applies: the business is not charged compensatory VAT liabilities, and the tax credit generated upon the acquisition of such property is not adjusted.

To apply this rule, it is important to confirm that the property was destroyed or lost specifically as a result of force majeure. The State Tax Service requires relevant source documents and a certificate of force majeure issued by the Ukrainian Chamber of Commerce and Industry or a regional chamber of commerce and industry authorized by it.

A separate rule applies when writing off fixed assets—such as equipment, a vehicle, or a building. If a company disposes of such an asset at its own discretion, for VAT purposes this is generally treated as a supply. However, if a fixed asset is destroyed or damaged due to force majeure and this is duly confirmed, no VAT is charged in connection with such disposal.

What to Do If Accounting and Source Documents Are Destroyed During Shelling

If, as a result of shelling, a business has lost source documents, as a general rule, it must notify the tax authority in writing within five days of the date the documents were lost, damaged, or destroyed. The notification must be accompanied by documents confirming the event that led to their loss. If the documents relate to customs clearance, the relevant regulatory authority that performed such clearance or issued the permits or authorizations provided for by the Customs Code must also be notified.

As a general rule, lost documents must be restored within 90 calendar days from the day following the date the tax authority received the notification. If the State Tax Service is unable to conduct a tax audit due to the absence of these documents, the audit may be postponed until the documents are restored and submitted, but for no more than 120 days.

At the same time, a special procedure applies to certain businesses during the war. This procedure is available to taxpayers who conducted business in areas of active hostilities or temporarily occupied territories and, due to the war, have lost their original documents or are unable to safely transport them out of the area. In such cases, a notification in any format should be submitted to the tax authority. It should specify the circumstances of the loss of documents, the relevant tax periods, and a general list of lost documents—including their details, if possible. The notice must be signed by the company’s director and chief accountant.

Such a notice has important consequences. Under a special procedure, the absence of source documents alone does not allow the tax authority to question the figures in the financial statements for the specified periods. Additionally, protection against documentary audits applies to these periods.

It should be emphasized that this special procedure applies only to taxpayers who operated in areas of active hostilities or in temporarily occupied territories.

A notification under the special wartime procedure can be submitted via the “Correspondence with the State Tax Service” menu in the Electronic Cabinet to the tax authority at the taxpayer’s primary place of registration. A paper notification may be submitted in person at an operating taxpayer service center, through an authorized representative, or by mail with a return receipt and a list of enclosed documents.

Олег Пархітько