The State Tax Service calls “business splitting” deliberate tax evasion. But is that really the case?

The State Tax Service is increasing its scrutiny of businesses that operate through several individual entrepreneurs or legal entities.

On 22 September, the tax authority again stated that so-called “business splitting” may be used to minimise tax liabilities and urged entrepreneurs to voluntarily abandon such business models.

The State Tax Service is paying particular attention to retail businesses, including electronics, household chemicals, food products, clothing, footwear, and other sectors.

The tax authority warns that possible consequences may include:

• additional tax assessments;
• financial penalties;
• challenges to the use of the simplified taxation system;
• referral of materials to law enforcement authorities;
• in relevant cases, the risk of criminal proceedings for tax evasion.

However, this raises a fundamental legal question.

⚖️ Lawyer’s opinion

We do not agree with an approach under which the mere existence of several individual entrepreneurs, or their operation within a particular business model, is automatically classified as “tax evasion”.

The simplified taxation system and the operation of individual entrepreneurs are expressly provided for under Ukrainian law.

If each entrepreneur genuinely carries out independent business activities, complies with statutory requirements, and pays the taxes required by law, the mere use of this form of business organisation does not in itself prove tax evasion.

Moreover, similar business models have existed in Ukraine for decades within the legally prescribed simplified taxation system and, for a long time, did not in themselves trigger such claims from the state.

This is precisely the position we defend and substantiate in disputes with tax authorities.

In our view, in each specific case the State Tax Service must prove not merely the existence of several individual entrepreneurs, but concrete violations of tax legislation, and must substantiate the relevant additional assessments with proper evidence.

Lawful business activity does not become tax evasion simply because the tax authority has begun calling it “business splitting”.

Therefore, a business operating through several business entities should now conduct a legal and tax audit of its model before a State Tax Service audit takes place.

WINNER Law Firm assists with tax audits, challenges tax assessment notices, and defends businesses in tax and criminal proceedings.

Would you like to review your business structure, or have you already received claims from the State Tax Service?

📞 Call: +38 096 574 81 02
📧 Email: info@uk-winner.com

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