VAT for FOPs in Ukraine: What Changes Await Entrepreneurs in 2025
In the autumn, Ukraine and the International Monetary Fund agreed on a new Extended Fund Facility program worth $8.2 billion, which, in addition to financial support, also contains a number of requirements for the country’s tax policy. One of the most resonant issues is the possible introduction of VAT for sole proprietors (FOPs). The idea immediately sparked a wave of debate and a sharp reaction from small businesses.
The government is not facing the need to seek additional sources of budget revenue for the first time during the war. The Extended Fund Facility (EFF) is one of the main forms of long-term support that the IMF provides to countries going through prolonged economic difficulties. According to the Prime Minister of Ukraine Yuliia Svyrydenko, Ukraine has undergone a record eight reviews of the current program, which has made it possible to attract about $10.6 billion out of the planned $15.5 billion.
The issue of VAT for FOPs became public after the IMF memorandum included phrases about the need for “elimination of exemptions for mandatory VAT registration” and combating “tax evasion”. Immediately after the appearance of this information in the media, they began talking about the possibility of introducing a threshold of 1 million hryvnias of annual income, after which a sole proprietor would automatically have to become a VAT payer. This would mean a serious unification of tax regimes and new reporting rules for tens of thousands of entrepreneurs.
However, already on December 3, Deputy Ihor Fris stated:
“The issue of sole proprietors and VAT is currently not being discussed at all and has been removed from the agenda. There are definitely not enough votes for this. And the state will look for other sources of budget revenue.”
Thus, the official position at the moment: the issue has been postponed, there is no real bill yet, and there is no political will for such changes in parliament.
Time for Action analyzed how the taxation system for FOPs could change in case of VAT introduction. Currently, there are two systems in Ukraine: simplified and general. FOPs on the simplified system pay a minimum amount of taxes and are not obliged to pay VAT. Under the new rules, every entrepreneur with an income of more than 83,000 hryvnias per month would have to not only pay the single tax and SSC, but also submit a VAT declaration every month, issue electronic tax invoices, and provide detailed reports on expenses and income.
For business, this would mean a significant complication of administration and an increase in the tax burden. For example, with an income of 83,000 hryvnias per month, net profit after taxes and VAT is reduced to 61,320 hryvniasinstead of 76,260 hryvnias. This creates a “trap” effect: those who earn just above the established threshold actually receive less net income than those who remain below that income level.
Economic analysts, including experts from CASE Ukraine and other leading centers, have stated: “Its implementation may have extremely negative consequences”. On the one hand, the authorities want to reduce abuses when big business is split into hundreds of FOPs, cash is withdrawn, or employees are hired as entrepreneurs instead of full-time staff. On the other hand, such innovations hit real small entrepreneurs freelancers, retailers, service companies.
Oleh Hetman from CASE Ukraine confirms: “The plan is to introduce a threshold. Not necessarily one million hryvnias. Now they are considering one or two million, or one and a half, but it is a certain threshold for all FOPs, after which you switch to VAT.” The IMF requires Ukraine to reduce the deficit, so the Ministry of Finance is offering various ideas to broaden the tax base.
At the same time, some experts admit that some problems in the system really exist. For example, Hlib Vyshlinsky from the Center for Economic Strategy calculated that with equal amounts of payments, the difference in taxes paid between employees and FOPs is 7.5 million hryvnias in favor of FOPs. It is this “loophole” that the state wants to close, but in the process risks destroying a large layer of small entrepreneurship.
The risks of introducing VAT for FOPs are not only economic losses for business, but also an increase in the shadow market, the outflow of qualified personnel, and a decrease in tax revenues in the long run. Some experts warn: “This could lead to the closure of most FOPs, an increase in the shadow economy and corruption.”
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Today, the political will to implement this initiative is absent, but the pressure from the IMF and budgetary challenges leave the issue open. Most likely, in the future, the authorities will have to look for compromises: raise the threshold, implement gradually, or launch pilot projects. However, the massive introduction of VAT for all FOPs currently looks unlikely.
Time for Action sums up: The introduction of VAT for FOPs is a matter not only of fiscal expediency, but also of balancing the interests of the state, business, and society. In the current situation, small business remains a critically important support for the country’s economy during wartime and recovery. Every tax initiative must take into account both the macroeconomic effect and the realities of everyday entrepreneurship.
How do you think: should VAT for FOPs be introduced now, or are there other ways to fill the budget without harming small business?
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