Introducing VAT for sole proprietors in Ukraine to lead to closures, rise in shadow economy – Expert Economic Platform
Ukraine's commitment to eliminate the exemption that allows small businesses to operate without registering as VAT payers, currently under discussion as part of a new IMF memorandum, risks triggering a mass shutdown of small businesses and a sharp expansion of the shadow economy, according to a joint statement by the Expert Economic Platform, which brings together Ukrainian analytical centers.
"We are concerned about Ukraine's commitment to cancel the exemption for VAT registration, which clearly relates to single tax (simplified regime) payers and introduces a turnover threshold for mandatory VAT registration. Its implementation could have extremely negative consequences," the statement published on the platform's website reads.
Signatories include: the Center for Social and Economic Research CASE Ukraine; the Institute for Social and Economic Transformation; the Ukrainian Institute of Legal Policy; the Institute of Economic Leadership; the Advanter Group analytical center; the ANTS national interests protection network; the Chief Economist's Office of the Coalition of Business Communities for Ukraine's Modernization; the Institute of Finance and Law; the Association of Tax Advisors; the Institute for Tax Reform; economist Pavlo Kukhta (Deputy Finance Minister in 2019–2020); and the Center for Economic Research and Forecasting "Financial Pulse."
The think tanks argue that this decision would force most sole proprietors to shut down, deepen the shadow economy, and increase corruption. The authors also expect an outflow of highly qualified specialists seeking better conditions abroad.
According to preliminary information, the proposal would set a mandatory VAT registration threshold at an annual turnover of UAH 1 million. This would affect more than 644,000 sole proprietors who generated comparable income in 2024 under the simplified tax system.
Analysts warn that VAT administration is the most burdensome tax procedure in Ukraine, and extending this requirement to microbusinesses undermines the very foundation of the simplified tax system.
"Imposing such an obligation on microbusinesses could completely nullify the core purpose of the simplified tax regime, to free the smallest entrepreneurs from the burden of accounting, reporting, and tax inspections, which are often accompanied by corruption pressures," the analysts said.
They estimate that adopting this decision would cause public welfare losses of UAH 150–180 billion (about 1.5–2% of GDP), while the potential budget gains from combating abuses within the simplified system amount to only UAH 10–13 billion.
The signatories called on President Volodymyr Zelenskyy, Prime Minister Yulia Svyrydenko, Verkhovna Rada Speaker Ruslan Stefanchuk, National Bank Governor Andriy Pyshnyy, Finance Minister Serhiy Marchenko, and Economy, Environment and Agriculture Minister Oleksiy Sobolev to first dismantle large-scale tax evasion schemes. In particular, experts recommend focusing on informal employment (with losses estimated at UAH 200–265 billion annually), gray imports (UAH 105–120 billion), excise tax evasion (UAH 39–43 billion), disguising employees as sole proprietors (UAH 16–19 billion), and business splitting (UAH 10–13 billion).
Experts also note that in the European Union, the threshold for special VAT regimes is EUR 100,000, significantly higher than the limit proposed for Ukraine.
MP Oleksandr Fediyenko wrote on Facebook that the issue of switching sole proprietors to the general taxation system also surfaced during the Servant of the People faction's discussion of the draft 2026 state budget with Svyrydenko and Marchenko on the evening of December 1.
"I believe this is one of the most difficult topics of the upcoming budget year, and of the budget process overall. Unfortunately, the Ministry of Finance was not prepared. The discussion looked like this: Sole proprietors are a problem, they must all be cut and moved to the general system with VAT, otherwise the IMF won't give us money and everything will go badly," he wrote.
He also urged entrepreneurs to articulate their position and join the discussion.
Meanwhile, Hlib Vyshlinsky, head of the Centre for Economic Strategy (CES), urged colleagues to clearly indicate the conditions under which they themselves work, whether as sole proprietors or under the general taxation system, when participating in such debates.
"Before expressing expert opinions, it would be good to add a disclaimer explaining how exactly the expert earns their income. And whether there is a conflict of interest (spoiler: there is)," Vyshlinsky wrote on Facebook.
As for determining whether a VAT threshold of UAH 1 million a year is optimal under the current administration system and with a single tax rate for all economic activity codes, Vyshlinsky said this requires separate analytical work.
"And the Ministry of Finance and the IMF should understand this. We, of course, are already working on it," he said.
As reported earlier, Ukraine and the International Monetary Fund reached a staff-level agreement (SLA) on a set of macroeconomic and structural measures that could be supported under a new 48-month Extended Fund Facility (EFF) arrangement, with potential access to SDR 5.94 billion (about $8.1 billion, or 295% of quota).
According to the IMF statement, Ukraine committed to accelerating efforts to broaden its tax base, in particular by "eliminating exemptions from VAT registration."
The ministries of finance and economy, as well as the government, have so far refrained from official comments on these proposals.
Current annual income thresholds for sole proprietors are: UAH 1.336 million for Group 1 (167 minimum wages), UAH 6.672 million (834 MW) for Group 2, and UAH 9.336 million (1,167 MW) for Group 3. Meanwhile, the VAT registration threshold has long remained at UAH 1 million. According to government sources, the proposal is seen as a safeguard against using sole proprietors to split large businesses and optimize taxes instead of hiring employees.
