Tax Service vs. Simplified Taxpayers: Is Every Third Sole Proprietor a “Schemer”?

In recent years, the tax authorities have increasingly spoken about “massive abuse of the simplified tax regime” and business splitting schemes, where instead of one taxpayer there appears a chain of formally independent sole proprietors or small companies on the simplified system. In public rhetoric, we often hear that “every third” single tax payer is not a small business, but a “mask” for a large one, which leads to more audits and analytical checks. The problem of artificial splitting is real, but this blanket suspicion of “every third” also hits bona fide businesses that simply use a legal regime, and as a result the tax service risks losing the trust of the very small businesses the state claims to prioritize.

What “schematic splitting” means for the tax authorities
By splitting, tax officials usually mean situations where:
· a large business deliberately divides its activity among several sole proprietors or small companies in order to stay within the limits of the simplified regime;
· related companies in fact operate as a single business structure (shared management, staff, one brand and infrastructure), but formally present themselves as many separate “small” entities;
· a chain of simplified‑regime entities is used to bypass rate or activity restrictions, with each of them performing only part of the operations.

The economic effect is obvious: instead of paying corporate income tax, VAT and social contributions in full, the business operates under low single‑tax rates and significantly reduces its tax burden. For the tax authorities this means lost revenue and “unfair competition” towards those who work transparently under the general system.

Why almost everything looks suspicious
The issue is that the signs of “bad” splitting often overlap with the features of a normal modern business structure. For the analytical units of the tax service, the following may act as triggers:
· the same owner/manager in several sole proprietors or companies;
· shared address, website, phone number or brand;
· sales concentrated on one or two major customers;
· repeated transactions of the same type with the same counterparties.

Modern small business often looks exactly like this: one entrepreneur runs several lines through different sole proprietors, freelancers work under a common brand, and service companies cooperate around one large client. These signs by themselves do not prove abuse, but within the logic of “every third is under suspicion” the tax service tends to see them as elements of a scheme. The risk of such mass suspicion is a shift away from the presumption of good faith: instead of having to prove that operations are artificial, the state effectively expects the business to justify why it has several sole proprietors and has not merged into a single company.

Weaknesses of the fiscal approach
· Focusing on slogans like “every third simplified taxpayer is a schemer” works well in the media space but poorly in real administration.
· There are no clear legal criteria for splitting: the law does not prohibit having several sole proprietors or companies, and everything rests on value‑based notions, which leaves room for subjectivity.
· Small business overload: instead of targeting large schemes, the tax service spends resources on mass “screenings” of small taxpayers with minimal fiscal effect.
· Reputational damage: labelling all simplified taxpayers creates an image of the tax service as an enemy, encouraging not dialogue and voluntary compliance, but the search for new and more sophisticated schemes.

Why businesses choose multi‑entity structures
It is important to admit that part of the splitting is a reaction to the tax system itself. When:
· the general tax system implies significantly higher rates and more complex administration;
· single‑tax thresholds are strict and limits fail to keep up with inflation and real business growth;
· the rules of the game keep changing and the risk of additional assessments is high;

business naturally looks for legal (and semi‑legal) ways to minimise the burden. In many cases, the decision to “spread activities across several entities” arises not from a desire to “cheat the state at any cost”, but as a way to survive amid instability and high formal taxes.

For small and medium‑sized businesses, this is also a risk‑management tool: if one link “goes negative” or falls under sanctions/blocking, the others formally remain operational.

What the state could do instead of mass suspicion
If the goal is not just to “squeeze” part of simplified taxpayers but to genuinely reduce the incentive to split, the state must change its approach.

Possible steps:

1. Introduce transparent risk criteria: publicly define which combinations of indicators (related owners, lack of economic rationale for separation, purely nominal functions) the tax service will treat as signs of artificial splitting.
2. Revise the parameters of the simplified regime: adjust limits, rates and restrictions to market realities and offer more flexible models to reduce the incentive for technical splitting.
3. Focus on targeted rather than mass campaigns: work with sectors where abuse is most widespread, collect evidence and build strong, illustrative cases instead of general slogans.
4. Communicate without stigmatisation: explain what a correct and safe multi‑entity business structure looks like, so compliant taxpayers understand the boundaries of what is allowed.

What entrepreneurs should do now
In a reality where the tax service suspects “every third” simplified taxpayer, any such business, especially one with a group of related sole proprietors/companies, should prepare in advance:
· analyse the structure: who is the formal owner, where counterparties overlap, how the “chain” looks from a tax inspector’s perspective;
· record the economic rationale: why the business is structured this way (separate business lines, different risks, different partners, etc.);
· put records in order: document flow, contracts and primary documents, so you can demonstrate the reality of operations if needed;
· assess whether it might be simpler to partially exit the split structure (merge some entities, change the regime) than to constantly operate in a high‑risk zone.

It is essential to remember that even if a business has no intention of evading taxes, the mere existence of several related simplified‑regime entities can attract the tax service’s attention. It is better to have a clear story, documents and a thought‑out position by the time questions arise than a chaotic set of invoices and contracts.

If you have questions or issues related to suspected business splitting, the structure of your sole proprietors and companies, audit risks or potential additional tax assessments, you should seek professional advice to analyse your specific situation and choose a safe tax‑burden model.

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