Hetmantsev on the growth of sole proprietors

The statement by the head of the Parliamentary Finance Committee, Danylo Hetmantsev, that “it is an absolute anomaly when the number of sole proprietors (FOP) increases during a war” has sparked an active debate among experts and business: at first glance, the rise in entrepreneurship against the backdrop of falling GDP looks like a sign of economic flexibility, yet Hetmantsev himself explains this trend primarily by the expansion of shadow schemes and tax minimization rather than by any real economic miracle.

The phenomenon of “plus 200,000 FOPs” amid economic decline
According to Hetmantsev, during the full‑scale war Ukraine’s economy has contracted significantly, and even under an optimistic recovery scenario it will return to the 2021 level only around 2038, so the increase of about 200,000 FOPs is, in his view, “an absolute anomaly”, since an expansion of entrepreneurship is usually expected in a growth phase, not a recession. Statistics show that in just the second year of the full‑scale war about 315,000 new FOPs were registered – a record for the past decade – bringing the total number close to 2.2 million, with constant migration between opening and closing. On the one hand, this demonstrates the adaptability of Ukrainians who, after losing their jobs or relocating, move into self‑employment; on the other hand, the sharp surge against the backdrop of a shrinking economy indicates that a significant share of new FOPs is linked not to new business projects, but to shifting existing schemes onto the simplified tax system.

“Business splitting” as the main explanation
Hetmantsev explains the “anomalous” growth in FOPs primarily by the splitting of medium and large businesses into networks of formally independent sole proprietors in order to reduce the tax burden and avoid VAT: a large share of new FOPs, he argues, is not genuine small business but a tax‑optimization tool for major players. Even before the war, the practice of “salary FOPs” – when employees are formally registered as sole proprietors to avoid paying the full tax package on wages – was heavily criticised, and the full‑scale invasion has only intensified this logic, as businesses under cost pressure look for legal, albeit controversial from the standpoint of tax fairness, ways to cut taxes. The structure of new registrations also supports the “schematic” nature of part of the FOP boom: among the most common activity types are online retail and IT services, where large marketplaces and service companies often reassign parts of their operations and staff to FOPs while retaining actual control over business processes.

Is FOP growth really a threat rather than an opportunity?
This raises the question of whether the increase in FOP numbers is unequivocally negative: formally, FOP status is a legal form of entrepreneurship that allows people to work “in the open” and pay taxes (albeit lower than large companies), so registering as a FOP is still preferable to fully shadow incomes or labour migration. At the same time, Hetmantsev criticizes not so much “classic” small entrepreneurs as the systemic distortion whereby a large part of the tax base is concentrated in the simplified regime, where the tax is only weakly linked to real margins and turnover, thereby constraining the budget’s ability to finance defence and social spending during wartime. Moreover, the mass use of FOP‑schemes for optimisation creates unequal playing conditions: companies on the general system with full VAT and corporate income tax face a competitive disadvantage compared with those that formally “split” their activities among dozens of FOPs, which leads not only to revenue losses but also to distortions in market structure and investment incentives.

The state’s stance: de‑shadowing instead of “hunting FOPs”
Hetmantsev emphasises that the goal is not to “tighten the screws” on all FOPs or to change the single tax before the war ends, but to target “salary” and “schematic” FOPs used by big business for systematic tax evasion. In effect, the state is proposing a renewed “social contract”: a future reduction in the overall tax burden in exchange for businesses abandoning shadow practices, but delivering on this approach requires greater trust in institutions, transparent rules and predictable enforcement – all of which are still lacking, so entrepreneurs continue to prefer the most flexible and “safe” FOP format.

What conclusions should business draw?
The key signal for business is straightforward: the era of consequence‑free splitting schemes disguised as small business is ending, and tax authorities are increasingly scrutinising payments, interaction with FOPs and the real substance of operations. Small entrepreneurs who genuinely run their own businesses should distance themselves as far as possible from the “schematic” segment – by maintaining transparent accounting, proper documentation and a clear economic rationale. Medium and large businesses should already be reviewing their FOP‑based structures and modelling scenarios in which part of their operations is moved onto the general tax regime. In the coming years, the main trend is likely to be not the mass liquidation of FOPs, but a gradual convergence of tax rules across business forms and tighter control over large turnovers on the simplified system; for those who adapt early to more transparent standards, this transformation may open up better access to financing, government programmes and partnerships.

If you have questions or face challenges related to choosing the optimal legal form for your business, structuring relations with sole proprietors, de‑shadowing operations, managing tax audits or minimising fiscal risks, you should seek professional advice.

Author: Ihor Yasko, Managing Partner at JSC “WINNER Law Firm”, PhD in Law.