The All-Ukrainian Congress of Farmers, in partnership with the international humanitarian organization Mercy Corps, conducted another webinar for farmers on the topic of collaboration and cooperation in agricultural production. The event expert was Iryna Zubrytska, a financial and accounting consulting manager, who detailed the specifics of registration and accounting for the main forms of cooperation between farms.
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In agriculture, due to seasonality and the specificity of land attachment, there is often a need for cooperation between farms and farmers. As the expert noted, historically, Ukraine has had cooperatives that first emerged in the late 19th century in Kharkiv region, in Slobozhanshchyna. Ukrainian farmers have long been accustomed to the principle “together even father is easier to beat,” so farms constantly seek various ways of cooperation for efficient resource utilization.
The Most Common Form – Contracting Agreement
Iryna Zubrytska explained that the most widespread and familiar form of cooperation between farmers is a contracting agreement for growing agricultural products. Such an agreement is concluded when the customer does not have equipment, workers, or cannot independently process their land, or it is simply economically impractical.
The contractor can either specialize exclusively in providing such services, or it can be a neighboring agricultural enterprise that, due to crop rotation, does not need this equipment in the current year and can help neighbors harvest, sow, or process certain plots.
“We all know that, for example, buying a grain harvester for a small enterprise so that it stands idle all year simply has no economic feasibility,” explained the expert. Therefore, contracting agreements are very often used, and considering the seasonality and large territory of Ukraine, when harvest begins, these combines move from south to north and gradually thresh fields for all customers.
The expert emphasized that there are no special differences from a regular contracting agreement – it’s the same work performance contract that everyone has encountered in business activities, most often in construction. The harvest that is collected or sown belongs to the customer, and the contractor receives payment and does not acquire rights to the products.
Important Points When Drafting the Contract
Iryna Zubrytska emphasized the importance of clearly specifying specific work and the place of its performance. This will protect against further disputes between parties and from tax authority questions regarding the reality of business operations. If work is detailed, then even at first glance it’s clear that this is not a fabricated contract, but real activity.
The price can be fixed, for example, per hectare of certain work, or may contain a condition of dependence on weather conditions. You can also include compensation for equipment travel to a certain plot, since fuel is now expensive, and sometimes equipment has to be transported far.
The form of payment can be either monetary or part of the harvest. In the latter case, this needs to be specified in the contract or an additional agreement made after it becomes clear that monetary payment cannot be used for some reason.
The Biggest Problem – Material Transfer
The most problematic aspect from audit and tax inspection experience is the process of documentary transfer of materials for work performance. “Very often this is not documented and no attention is paid to it. And then the tax service comes for inspection and asks how materials for this work were transferred,” warned the expert.
For example, if you hired a contractor to sow a plot and provide him with your seeds, he must accept these seeds by act, by invoice in accordance with the contracting agreement, and then report and return the remainders. Only based on this report, and not just the act of completed work, can these seeds be written off to the cost of agricultural work.
Excise Hell with Fuel
The biggest issue that arises during contracting agreements appeared after 2016, when the issue of excise tax and accounting for fuel and lubricants changed significantly. Previously, they calmly provided contractors with their fuel and didn’t worry, but after changes in the Tax Code, the situation changed dramatically.
Any transfer of fuel and lubricants began to be considered their sale and require a whole series of compliance requirements: registration in the electronic administration system of excise invoices, excise warehouse, licenses, etc. This entails huge fines, and as analysis of court practice shows, this is an absolutely real danger.
Therefore, clarification was issued on what conditions fuel transfer from customer to contractor would not be considered a sale. For this, three conditions must be met, with the second condition having sub-conditions.
First condition: the customer does not sell fuel to other persons and is not an excise tax payer.
Second condition: refueling is carried out in the equipment’s fuel tank exclusively for agricultural work on the customer’s lands under contract. That’s why the contract must clearly specify where exactly the work is performed, on which lands, with which cadastral numbers.
Third condition is the most complex and most expensive for small business: refueling must occur from vehicles, not from stationary sources or pumps, specifically from fuel trucks. And these vehicles must be equipped with flow meters costing on average from 100 thousand hryvnias.
“Practical implementation of these norms is very often difficult because it’s sometimes simply impossible – either there’s no fuel truck, or not everyone can afford to install a flow meter,” explained Iryna Zubrytska.
Ways Out of the Excise Trap
If all these conditions are too complex and technically impossible to fulfill, there are action options to avoid recognizing equipment refueling as fuel sale.
🔹 First, you can buy smart cards or fuel vouchers. In the absence of fuel ownership transfer, the enterprise is not obligated to register as an excise tax payer if it transfers these smart cards by act for contractor equipment refueling.
🔹 Second, you can provide for expense compensation in the contract. The contractor provides reports, waybills, calculations, and the customer by agreement increases the contract payment amount – part goes to service payment, part to fuel expense compensation.
🔹 Third option – equipment rental with crews, which the expert discussed in more detail at the end of the webinar.
Complex but Effective Joint Activity
As the second form of cooperation, Iryna Zubrytska named joint activity, which is more complex in documentary registration, but very often the question arises why such a complex way of organizing contractual activity.
“This is all connected to the fact that probably only in agricultural production there is the biggest peculiarity – land. As Mark Twain said: ‘Buy land, they’re not making it anymore,’” quoted the expert. There’s attachment to where to grow, and very often these land plots belong to state institutions, institutes, non-profit organizations, schools, lyceums.
When there is a plot, but the owner or user himself does not have the capabilities or resources to process it, the land stands idle. At the same time, certain conditions limit the land plot owner, and he cannot or does not want to lease this plot. Therefore, an agricultural enterprise combines its efforts with another institution or institutions, since a joint activity agreement can have several parties.
Features of Joint Activity Registration
The joint activity agreement has long been provided for by the Civil Code of Ukraine and was once very widespread and popular, but is now less popular since it’s quite difficult to keep records of this activity, although actually there’s nothing impossible or complex if you understand it.
Joint activity can provide for both pooling of contributions and without pooling contributions. This activity can be carried out in the form of a simple partnership or simply in the form of a joint activity agreement. The contract must be written, can be notarized, but this is not mandatory.
The contribution can be property, funds, professional knowledge, skills, abilities, even business reputation. It’s necessary to evaluate and specify each party’s contribution, since profit distribution and distribution of what’s obtained during joint activity will be agreed upon according to the contribution. Sometimes it may even be that regardless of contribution size, parties agree that if someone takes more active participation and spends more resources, their share can be valued higher than the contribution itself.
Warnings Regarding Registration
The expert emphasized the importance of avoiding any ambiguous formulations so that the joint activity agreement is not requalified into some other contract, for example, service provision or land lease. Very often from practice, if the contract is written incorrectly, the tax authority tries to requalify this contract to create certain tax obligations.
Under no circumstances should the contract include a condition for mandatory payment for land use to a participant regardless of whether profits or losses are obtained. This can be easily requalified as a lease agreement with corresponding legal and tax consequences.
Tax Nuances of Joint Activity
Registration of a joint activity agreement with the tax authority is mandatory only when it comes to VAT – when turnover for joint activity is expected to exceed 1 million hryvnias. In such a case, it’s better when concluding the contract to register the agreement as a VAT payer in advance, since it will receive its own registration number separate from participant numbers.
If all participants are VAT payers, it’s obvious that joint activity is beneficial to register as a VAT payer, since all transfers from joint activity to participants are supply from the Tax Code standpoint.
Joint activity separately does not pay income tax. Participants receive income from joint activity and pour this income into their financial result if they are income tax payers.
If joint activity participants are single tax payers, this is the most fiscal option. When a third group single tax payer becomes the joint activity operator, the tax service considers everything received to the joint activity account as operator income. Therefore, specialists do not advise third group single tax payers to become authorized participants.
Equipment Rental with Crew – New Trend
As the third form of cooperation, Iryna Zubrytska named equipment rental with crew. This is a fairly new option that was first provided for in 2014 in the Civil Code, but it’s quite widespread in agricultural production since it removes excise risks.
In this case, refueling is not considered excise fuel sale and does not create excise risks. The only thing to understand is that for this rental agreement not to be requalified during inspection into a contracting agreement, it must be clearly specified that this is an equipment rental agreement with crew.
“When one participant has equipment and the second has fuel, then it’s more expedient and fewer excise risks will be not to hire the one who has equipment and provide him fuel, but on the contrary – to rent this equipment together with crew and as a tenant absolutely legally refuel this equipment with your fuel,” explained the expert.
The crew that services the equipment remains employees of the lessor, who bears full responsibility for work, salary calculation, vacation pay, sick leave. In addition, the lessor must have the appropriate registered KVED – 7731 (agricultural machinery rental) or 0161 (vehicle rental with personnel).
If one of the contract parties is an individual entrepreneur, the contract must be notarized. Repair and maintenance are agreed upon by parties, but usually the tenant performs current repair and technical maintenance, while the lessor performs major repairs.
When renting equipment with crew, fuel always belongs to the tenant and this is their own use. But waybills are compiled and issued by the lessor in agreement with the tenant.
Summarizing the story about three forms of cooperation, Iryna Zubrytska noted that each has its advantages and disadvantages. It’s impossible to say that some are better, some worse. Considering the peculiarities of agricultural production, certain nuances of tax advantages and disadvantages, legal advantages and disadvantages, and certain limitations imposed by the main resource – land and its ownership and use rights – must be taken into account.
The event took place within the Farmer Support Program, implemented by the All-Ukrainian Congress of Farmers in partnership with Mercy Corps, with financial support from the Howard G. Buffett Foundation.
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