VAT for FOPs 2027: What is known?

FOPs with income from 1 million hryvnias will pay 20% VAT from 1 January 2027: position of the Ministry of Finance and consequences of the changes.​
At the end of 2025, the Ministry of Finance of Ukraine published a draft law that caused significant resonance among small‑business representatives. According to the document, from 1 January 2027 individual entrepreneurs (FOPs) whose annual income exceeds 1 million hryvnias will be obliged to register as value added tax payers and pay 20% VAT. This step will become one of the most visible stages of the “restart” of the simplified taxation system, aimed at its gradual approximation to the general model of tax administration.​

Background to the changes. The Ministry of Finance justifies the initiative by the need to reduce fiscal losses and ensure equal competitive conditions among business entities. According to the ministry, the current simplified system model creates a “tax gap” between FOPs and legal entities, which complicates control over shadow schemes and leads to under‑reporting of real income volumes. Due to low tax burden and the absence of VAT accounting, part of FOPs in fact operate as medium‑sized businesses, receiving significant profit without appropriate taxation. The Ministry notes that such practice does not comply with the principles of fairness and equal access to the market. The draft law explicitly states that the introduction of VAT for FOPs with income above 1 million UAH will increase transparency of settlements, discipline business and at the same time raise budget revenues.​

How the 1‑million‑hryvnia threshold works. Under the proposed rules, the 1‑million‑hryvnia indicator will be determined based on the results of the calendar year. If a FOP’s income exceeds this threshold, they automatically fall into the category obliged to register as a VAT payer no later than 1 January of the following year. In addition, a separate reporting and administration procedure will be established for such entrepreneurs, bringing them closer to the standards applied to ordinary taxpayers on the general system. According to the authors of the draft law, the 1‑million‑UAH threshold is a “fair compromise” between protecting micro‑business and strengthening tax discipline. Thus, FOPs with a small turnover will remain in a preferential regime without VAT, while entrepreneurs whose income indicates de facto participation in mid‑level trade will be included in the unified tax accounting contour.​

New rules for simplified taxpayers. The Ministry’s draft also proposes to update the very philosophy of the simplified system. It envisages a revision of limits for all groups of single‑tax payers and a gradual abolition of the simplified regime for certain types of activities that display signs of “disguised” medium‑sized business — in particular wholesale trade, IT outsourcing, advertising services and the like. In addition to mandatory VAT, for FOPs whose income exceeds 1 million UAH a phased introduction of electronic transaction accounting, mandatory use of cash‑register equipment and submission of quarterly reporting is planned. These steps are a logical continuation of the tax system’s digitalisation, which has been actively progressing since 2022.​

Potential benefits for the state. The Ministry of Finance estimates possible additional revenues from the reform at 25–30 billion UAH annually. A reduction in the volume of “grey” operations is also expected, when legal entities artificially split their activities into several FOPs to avoid VAT or corporate income tax. The introduction of VAT for a specific group of entrepreneurs should also create an incentive to legalise supply chains, since legal entities will find it more beneficial to work with VAT‑paying counterparties that can provide tax credits. The Ministry predicts that this will increase overall business‑environment transparency and facilitate control over cash flows.​

Risks for small business. The business community has reacted ambiguously to the initiative. Expert associations warn that the introduction of 20% VAT may become an excessive burden for small traders and service companies that work with final consumers and do not have access to tax credits. For them, the additional fiscal burden may in practice mean higher prices or reduced margins. There are also concerns that some businesses will simply “go into the shadows” to avoid the new tax. Given the insufficient level of trust in tax authorities and the complexity of VAT accounting, such risks cannot be ruled out. Economists emphasize that without simplification of administrative procedures and effective electronic tools, the reform may have the opposite effect — increasing the burden without a substantial rise in revenues.​

Position of business associations and public consultations. At the time of publication, public discussions of the document are ongoing. The Federation of Small and Medium‑Sized Business of Ukraine has already appealed to the Ministry of Finance with a proposal to raise the threshold for mandatory VAT registration to 2 million UAH or to introduce a gradual transition — for example, 10% in the first year and only from 2029 to increase the rate to 20%. Some experts also propose introducing an adaptation period, giving entrepreneurs 6–12 months to organise their accounting and set up electronic reporting. Others stress the need to simultaneously reduce the single‑tax rate for this category or to introduce a mechanism for partial offset of VAT paid.​

European context. Introducing VAT for entrepreneurs above a certain income level corresponds to common European practice. In most EU countries, similar thresholds range from 35 to 100 thousand euros. Thus, the Ukrainian threshold of 1 million UAH (about 25–26 thousand euros) is even below the average. On the other hand, the EU has advanced mechanisms of automatic VAT crediting, compensation and fast refunds, which the Ukrainian system still lacks. At the same time, experts note that harmonising tax rules with European standards is a necessary condition for Ukraine’s further integration into the EU internal market. In this context, the introduction of “threshold” VAT for FOPs is perceived not as an isolated fiscal measure but as a stage of comprehensive regulatory convergence.​

What entrepreneurs should expect. The next two years will serve as a preparatory period. In 2026, the law itself and a series of by‑laws detailing the new rules of accounting, reporting and liability are to be adopted. Entrepreneurs are advised already now to analyse their income structure and cost ratios to assess whether they will fall under the new requirements. Recommended steps include: checking the actual annual turnover and comparing it with the projected threshold; considering voluntary early VAT registration to avoid a sudden jump in tax burden; streamlining document flow and learning to use electronic tax‑filing systems; and revising pricing policies with a view to future VAT inclusion in the cost of goods or services. Despite the challenges, these changes offer a chance for greater legality and predictability of business, especially for FOPs planning scaling‑up or international cooperation.​

Conclusion. The introduction of mandatory VAT payment for FOPs with income above 1 million UAH is one of the most important stages of the reform of the simplified system in Ukraine. The Ministry of Finance’s draft law has the potential to increase transparency, align tax policy with European standards and raise budget revenues. At the same time, its success will depend on how far the state can ensure simplicity of administration, predictability of rules and business trust.​
Author: Ihor Yasko, Managing Partner at WINNER Law Firm, PhD in Law.​