VAT AND SOFTWARE: WHEN IS IT A SERVICE AND WHEN IS IT A PRODUCT?

Abstract

This study examines the complexities of VAT taxation for transactions involving software products supplied to non-residents under martial law in Ukraine. It highlights the pivotal role of strategically important enterprises in ensuring economic stability through tax compliance, job creation, and technology transfer. The research focuses on the legal and tax challenges in classifying software transactions as either goods or services, based on the provisions of the Tax Code of Ukraine (TCU) and individual tax consultations. The analysis reveals inconsistencies in the interpretation of TCU provisions, particularly in defining the place of supply and the nature of software transactions. Two individual tax consultations (ITC №2326 and №26736) are compared, showing conflicting classifications: one treats software supply as a service exempt from VAT (per Article 186.3 TCU), while the other considers it a taxable good (per Article 186.1 TCU). This ambiguity creates significant risks for businesses, necessitating clearer contractual terms and regulatory frameworks. The study proposes tactical recommendations, such as precise contract wording to clarify ownership and usage rights, and strategic measures, including aligning Ukrainian tax legislation with international practices (e.g., EU Directive 2006/112/EC) and harmonizing regulatory interpretations to reduce contradictions. The introduction of the term “Schrödinger’s software” illustrates the dual nature of software as both a taxable and non-taxable entity depending on contract terms. The findings underscore the need for unified criteria in licensing and sales contracts to minimize tax risks and enhance transparency in Ukraine’s IT sector. Future research should explore the impact of digitalization and cloud services on VAT regulations.