VAT for individual entrepreneurs: 5 facts about Ukraine's main tax reform

Why Is Everyone Talking About Taxes?

News about the possible introduction of mandatory VAT registration for Sole Proprietorships with annual income above 1 million hryvnias has triggered a real storm in Ukraine’s business community. This initiative affects the interests of millions of entrepreneurs, especially in the IT sector, where more than 57% of specialists work as Sole Proprietorships. On January 6, news emerged about a possible increase of the threshold to 4.2 million hryvnias or 85,000 euros. This figure is considered the maximum threshold in the EU, which Ukraine seeks to join.

The key controversy lies in the clash of two legitimate but opposing forces: the state’s undeniable need for fiscal consolidation and budget revenues on the one hand, and the dependence of an entire entrepreneurial ecosystem on a stable and simple tax regime on the other.

However, the situation is far more complex and ambiguous than it seems at first glance. Behind the loud headlines are important nuances, counterintuitive effects, and alternative views that fundamentally change the picture. This reform is not just about higher taxes, but about fundamental changes to the rules of the game for all Ukrainian businesses.

In this article, we will break down five of the most important, most impactful, and most unexpected aspects of the tax reform. Relying on official documents from the Ministry of Finance, statements by government officials, and comments from independent experts, we will find out who the real target of the changes is, why IT exporters may even benefit, whether the IMF is really to blame for everything, how realistic the promises of “VAT in one click” are, and whether there is an alternative way to fight schemes.

1. The Main Target Is Not Small Entrepreneurs, but Large “Scheme Operators”

Despite the widespread belief that the reform is aimed at increasing revenues from microbusinesses, its official goal is much broader. The government plans to strike primarily at large companies that use the simplified taxation system to minimize their tax liabilities.

Finance Minister Serhii Marchenko stated this problem directly in an interview with LB.ua:

This position is also confirmed by the explanatory materials to the draft law published by the Ministry of Finance. They state that the goal of the changes is to curb “aggressive optimization, business splitting, ‘gray imports,’ and smuggling.” In this way, the state is trying to create a level playing field for all businesses by forcing large players to operate under the same legal framework as those who already pay VAT. Thus, the key challenge of the reform is the choice of instrument: is it justified to apply VAT—universal, but potentially toxic for microbusiness—to solve a problem that is localized in the segment of large companies?

2. IT Exporters May Avoid Higher Taxes (and Even Benefit)

One of the most counterintuitive facts is that for a significant part of the IT sector—namely Sole Proprietorships providing services to foreign clients—the tax burden may not only fail to increase, but may even decrease. The secret lies in the specifics of taxing export operations.

As experts note, the export of services is subject to VAT at a zero rate (0%). This rule is based on the international principle of taxation at the place of supply: since the end consumer is located outside the customs territory of Ukraine, VAT is not charged.

Consider a possible scenario. A Group 3 Sole Proprietorship paying the 5% single tax, who provides export services, exceeds the annual income limit. They must register as a VAT payer, but at the same time their single tax rate is automatically reduced to 3%. As a result, their tax burden will be 3% single tax plus 0% VAT. That is, in fact, the tax burden for such an entrepreneur will decrease from 5% to 3% (3% single tax + 0% VAT). Of course, this does not отменяє the need to keep records and file additional VAT reporting, which will increase administrative work.

3. The “IMF Requirement” Is Not Exactly an IMF Requirement

Tax reform is often presented as a no-alternative requirement of the International Monetary Fund. However, reality is somewhat more complex. The IMF does put forward general requirements to increase budget revenues and combat tax evasion, but the specific mechanisms to achieve these goals are proposed by the Ukrainian government.

Tax expert Kostiantyn Krasnoukhov emphasizes that it is the government that is “selling” the reform to society under the guise of an IMF requirement. He notes that in the European Union, on the contrary, the thresholds for mandatory VAT registration are being raised to 85–100 thousand euros per year, which makes Ukraine’s step—bringing hundreds of thousands of new entities into the VAT system—absolutely counter to the European policy of reducing administrative pressure on small business.

At the same time, the Fund’s position should not be underestimated. Finance Minister Serhii Marchenko acknowledges that the negotiations with the IMF were very tense, and avoiding changes was impossible.

«Is it possible to avoid changes in the simplified taxation system? No, it is not possible. And the discussion about this was quite difficult.»

Therefore, although the VAT initiative for Sole Proprietorships comes from the Ukrainian authorities, it is part of broader agreements with international partners to ensure the country’s fiscal stability.

4. The State Promises “VAT in One Click,” While Experts Predict Technical Challenges

Understanding that VAT administration is a complex process, the Ministry of Finance promises to make the transition as painless as possible for entrepreneurs. The government plans to introduce a set of service features to minimize bureaucracy.

Among the main promises:

• Automatic registration as a VAT payer based on data from reports and ECR, without the need to submit paper applications.

• Pre-filled declarations in the Electronic Cabinet based on the data already available to the tax authority.

• A quarterly reporting period for Sole Proprietorships instead of monthly, as for legal entities.

• A transition period until 2027 and a moratorium on penalties for errors in VAT administration during this time.

Deputy Minister of Finance Svitlana Vorobei assures that the state aims to create a service-oriented model.

However, despite the optimistic assurances of officials, experts point to a huge gap between the declared intentions and the technical realities. Lawyer Bohdan Yankiv draws a parallel with the recent fiscalization reform, which, being a task ten times simpler, took three years, and argues that implementing such a large-scale technical reform by 2026–2027 is unrealistic. According to his forecasts, the real horizon for a full-scale system launch is 2029–2031.

5. There Is an Alternative: “Hunt” Schemes, Not All Sole Proprietorships

This approach, proposed by economist Volodymyr Dubrovskyi, is a direct response to the government’s stated goal—fighting schemes—but it offers a “surgical” instrument instead of “carpet bombing” with VAT. The essence of his proposal is not to force all Sole Proprietorships to register as VAT payers, but to develop clear and objective criteria to identify artificial business “splitting” and apply sanctions to the organizers of such schemes.

This approach would allow combating abuses without creating problems for honest microbusinesses that operate via franchises or marketplaces. Among the criteria that may indicate a scheme, the expert names the following:

• A shared IP address from which tax reports of different Sole Proprietorships belonging to the same network are submitted.

• Use of shared offices, warehouses, equipment, websites, or employees.

• Lack of a public offer under which any unrelated entrepreneur could join the franchise or platform on the same terms.

• Sole Proprietorships are not owners of the equipment but lease it from a single owner, which is untypical for genuine franchising.

In the author’s view, this approach is a “civilized alternative” that makes it possible to effectively counter abuses without harming the entire ecosystem of small entrepreneurship in Ukraine.

How to Distinguish a Franchise from Business Splitting?

In tax control and enforcement practice, real franchising (commercial concession) is distinguished from schemes of artificial business splitting, which may be disguised as “pseudo-franchises.” The key difference is not the name of the agreement, but the economic substance of the relationship, the level of independence of the entities, and the actual distribution of risks and income.

Below are the criteria and indicators which, taken together, allow the interaction model to be assessed.

I. Economic Substance and Risk Allocation

Franchise (commercial concession)

A franchise involves granting, for a fee, the right to use a bundle of rights (trademark, business reputation, know-how, business standards). The franchisee:

• is an independent business entity;

• makes management decisions independently within the agreement;

• invests their own funds;

• bears entrepreneurial risks and is responsible for the financial result of their activity.

As a rule, the franchisor’s income is formed from an upfront fee and/or royalties.

Business splitting (pseudo-franchise)

In splitting schemes, the formal existence of several Sole Proprietorships or legal entities is not accompanied by real economic independence. Signs may include:

• lack of real influence of “partners” on business decisions;

• lack of their own investments or assets;

• dependence on a single organizer who effectively controls operations and concentrates profits.

In such models, entrepreneurial risk often remains with the de facto organizer, while Sole Proprietorships perform the function of distributing turnover rather than operating as independent businesses.

II. Openness of the Model and Joining Terms

Franchise

In real franchise models, cooperation terms are usually market-oriented: the franchisor is interested in attracting partners, although they may apply selection, territorial restrictions, or individual agreements.
The presence of a public or semi-public offer is not a legal requirement, but it often serves as practical confirmation of the model’s openness.

Business splitting

Splitting schemes are characterized by closed participation: involvement is limited to a pre-defined circle of related persons. An unrelated entrepreneur usually cannot join on the same terms, which indicates the absence of market-based franchising logic.

III. Pricing and Assortment

Franchise

A franchisor may set standards and provide recommendations regarding prices, assortment, and marketing campaigns. At the same time, the franchisee usually retains economic responsibility for the result and may have allowable room to manage prices or offerings.

Business splitting

Absolute identity of prices, assortment, and sales terms across all Sole Proprietorships is not, by itself, a violation, but in combination with other signs it may indicate a single management center and a lack of real independence of the entities.

IV. Technical and Organizational Signs of Relatedness (Risk Indicators)

In practice, tax authorities analyze a set of indirect signs that may indicate artificial business splitting, including:

• Shared resources: use of the same premises, warehouses, equipment, personnel.

• Digital traces: reporting submitted from the same IP address, shared ECR/payment terminals, unified accounting systems.

• Management: one accountant, manager, or authorized representative for several Sole Proprietorships.

• Time and method of registration: mass registration of entities within a short period under shared parameters.

Each of these signs alone is not proof of wrongdoing, but their combination may be used to demonstrate actual relatedness and artificial splitting.

V. Financial Flows and Sources of Income

Franchise

Financial relations are usually transparent and formalized:

• the franchisor’s income is a fee for using the brand and the system;

• the franchisee purchases goods, services, or raw materials on market terms and forms their own financial result.

Business splitting

Splitting schemes are characterized by:

• profit redistribution through product or service operations with minimal margin;

• centralized financing of Sole Proprietorships (trade credits, expense coverage, free use of assets);

• concentration of actual income with a single organizer.

Such financial flows may be regarded as a sign of a lack of real economic independence.

Thus, the difference between a franchise and business splitting is determined not by the form of the agreement or the name of the model, but by the actual circumstances of the activity. Tax conclusions are made only on the basis of a set of signs that indicate either real entrepreneurial independence or its absence.

VAT Accounting for Sole Proprietorships

By analyzing the capabilities of the Torgsoft software described in the sources and comparing them with the requirements that will apply to Sole Proprietorships on VAT from 2027, it is possible to highlight the functions that are already implemented in Torgsoft for VAT workflows:

• Creating and printing tax invoices (TI) and adjustment calculations (AC): the program allows issuing TIs directly during sales or via the “Trade with invoice issuance” mode. It also supports creating Appendix 2 (adjustment) in case of returns.

• Exporting documents in the tax standard (XML): Torgsoft supports exporting invoices in XML format for subsequent import into specialized reporting software such as M.E.Doc or Art-Zvit.

• Working with different VAT rates: the system allows configuring and using 20%, 14%, and 7% rates, as well as working with non-VAT goods (code 903) and export operations (0%).

• Flexible setup of details: the program automatically fills in seller and buyer data, allows selecting the responsible person, and lets you adjust the invoice form to reflect legislative changes.

• Special product fields and attributes: it supports tracking the “imported goods” attribute, service codes according to DKPP, and codes of agricultural producers.

• Consolidated tax invoices: there is an option to create consolidated TIs for regular supplies to one customer.

What’s Next?

Thus, the planned tax reform is a much more complex phenomenon than a simple tax increase. Its main goal is to fight large schemes, not microbusinesses. For IT exporters, it may even prove beneficial, although it will add administrative work. The IMF’s role in this process is important but not decisive, since the specific mechanisms are proposed by the Ukrainian side. The government’s promises of “VAT in one click” sound attractive, but experts doubt their technical feasibility in the coming years. Finally, there is an alternative path—targeted identification of schemes instead of total control.

Ultimately, the key question remains open: will the authorities choose a “surgical” intervention aimed at real schemes, or will they follow the path of “carpet bombing” that may affect the entire ecosystem of Ukrainian microbusiness? The answer will determine the future of entrepreneurship in Ukraine for years to come.