“Business splitting”: when optimization turns into tax evasion

The issue of the legality of tax optimisation lies on the borderline between business efficiency and the risk of liability, and one of the most debated tools has become “business splitting”, meaning the formal division of a single process between several legal entities or individual entrepreneurs (sole proprietors) in order to benefit from the simplified taxation system.​
Essence and motives of “splitting”
The typical purpose of such actions is to reduce the tax burden by:

• using the simplified taxation system (a single tax instead of corporate income tax and VAT);
• avoiding turnover limits;
• reducing payroll‐related charges;
• simplifying accounting and organisational record‑keeping.​

For example, a large restaurant registers several waiters and bartenders as “individual entrepreneurs” who ostensibly provide services independently. In reality, they work exclusively at one venue, in the same premises, under a single management team. Formally, this is a set of independent sole proprietors; in substance, it is a classic case of business splitting.​

Position of the tax authorities and court practice
The State Tax Service of Ukraine (STS) has repeatedly emphasised in its guidance that the artificial creation of several sole proprietors or interrelated legal entities, where they operate with the sole purpose of avoiding taxes, may be treated as tax evasion. The key focus of the fiscal authorities is not the number of entities but the existence of a single business process, centralised management, a common customer base, personnel or assets.​

Court practice on this matter is gradually developing. The Supreme Court, in a number of decisions, has supported the tax authorities where it was proven that:

• business transactions between related structures were fictitious or had signs of artificiality;
• the entities had no genuine business purpose other than reducing the tax burden;
• control over several entities was exercised by one individual or a group of individuals through family or employment ties.​

It is precisely the combination of such indicators that allows the splitting scheme to be qualified as an abuse of rights.​

Thin line between lawful optimisation and evasion
Optimisation is regarded as legitimate where business entities:

• have their own business purpose and economic independence;
• are not under a single centralised management;
• keep separate accounts and possess their own assets, staff and clients;
• were not created solely to reduce taxes.​

Conversely, the indicators of evasion include:

• duplication of functions between entities;
• shared offices, assets, bank accounts or logistics;
• understatement of turnover due to limits applicable to the simplified system;
• using relatives or subordinates as nominal owners of sole proprietorships.​

Thus, the line of legality lies not in the formal structure of the business but in the substance of the relationships and the economic logic of the operations.​

Why the risks are increasing now
After 2023, with the launch of modern analytical tools of the STS (“Tax Block”, “E‑cabinet”, etc.), it has become much easier to identify links between entities. The system analyses:

• common IP addresses, registration addresses and managers;
• identical suppliers or customers;
• synchronous transactions on bank accounts;
• recurring patterns in staff arrangements.​

Consequences of a scheme being treated as evasion
If the tax authorities prove that splitting is artificial in nature, the business may face:

• additional tax assessments (VAT, corporate income tax, unified social contribution);
• penalties for tax offences;
• loss of the single‑taxpayer status under the simplified system;
• criminal liability under Article 212 of the Criminal Code of Ukraine for tax evasion.​

In addition, managers risk attracting the STS’s attention during future audits of other structures personally connected with them.​

How to mitigate the risks
To minimise risks, lawyers recommend:

• conducting an internal audit of the business structure and assessing the economic rationale for establishing each entity;
• executing genuine intercompany contracts on arm’s‑length terms;
• separating management chains so that each entity has its own managers, hiring, warehouses and financial reporting;
• maintaining an evidence base of real operations (acts of acceptance, certificates of completed works, independent procurement, etc.);
• in case of doubt, obtaining an individual tax ruling, which may help avoid sanctions in the future.​

Conclusion
Business splitting is not a crime per se. However, when “optimisation” turns into an artificial construct without economic substance, it loses legal protection and becomes a violation. In today’s environment, where tax authorities have access to large volumes of data, the entrepreneur’s main task is to preserve the transparency, logic and reality of the business model.​

If you have questions or issues related to your business structure, tax audit risks or the classification of transactions as “business splitting”, contact our team’s experts — we will help protect your interests at every stage.
Author: Ihor Yasko, Managing Partner, WINNER Law Firm, PhD in Law.