Tax and criminal risks of business fragmentation

In the Ukrainian tax reality, “business splitting” has already become a systemic phenomenon with multi‑billion turnovers: instead of ordinary optimization, there is a deliberate construction of a network of private entrepreneurs and related structures that formally comply with the simplified tax regime but in fact operate as a single large business with hidden turnover and understated taxes.

According to the State Financial Monitoring Service and the tax authorities, in certain periods of 2025 alone such schemes generated transactions amounting to billions of hryvnias, while in some sectors annual budget losses exceed UAH 1 billion.

What “business splitting” means for the state.  By “business splitting”, supervisory authorities mean the artificial division of a large company’s activities among dozens or even hundreds of individual entrepreneurs (mostly affiliated with the same company) who apply the simplified taxation system.

Formally, each private entrepreneur appears to be an independent entity, but the combination of indicators shows that they operate as a single business: they share a common brand, management, personnel, infrastructure, and use common resources.

Supervisory authorities explicitly emphasize that such models are regarded not as acceptable tax optimization, but as a manipulation aimed at understating VAT and corporate income tax liabilities, as well as at organizing uncontrolled cash flows.

Accordingly, a business that deliberately builds such structures finds itself under increased scrutiny from tax, financial, and law enforcement authorities.

Scale of the problem: billion‑hryvnia cases.  The State Financial Monitoring Service and the State Tax Service record that “business splitting” schemes have reached billion‑level scales: just one model uncovered by the tax authorities involving 491 sole proprietors within seven retail chains generated over UAH 4 billion in income and caused UAH 668.5 million in VAT losses.

Within one month, the financial monitoring authorities detected “splitting” through 726 sole proprietors and more than 1,100 accounts in 19 institutions with a total cash flow exceeding UAH 4 billion, while the aggregate volume of suspicious operations in similar cases over several months reached almost UAH 10 billion; taking into account shadow schemes in retail, online trade and services, where annual budget losses from “envelope” salaries, cash‑only operations and “splitting” amount to at least UAH 1 billion, it becomes clear why these models have come into the focus of the state.

Typical indicators of artificial “splitting”.  In their guidelines and analytical letters, the Tax Service and the National Bank list a whole range of criteria used to detect artificial business‑splitting schemes. Key indicators include:

• Shared IP addresses, registration addresses, contact details and actual places of business for a large number of sole proprietors.
• Use of a single trademark, unified pricing policy, and centralized management of assortment and supplies.
• Employees effectively working in one company, while some of them are formally registered as sole proprietors who allegedly provide services independently.
• Concentration of settlements through a limited number of accounts, synchronized transactions, and lack of genuine entrepreneurial initiative on the part of sole proprietors (dependence on a single customer).

It is important that, in order to conclude that “splitting” is taking place, supervisory authorities usually assess a combination of factors rather than a single formal indicator. Therefore, even if a structure formally complies with the requirements of the simplified tax system, it may be deemed artificial if the business model shows a real unity of management, risks, and economic benefit.

Tax and criminal implications for business.  The detection of “business splitting” schemes leads not only to additional assessments of VAT and corporate income tax, but also to comprehensive audits, blocking of tax invoices, freezing of bank accounts, and forwarding of case materials to law‑enforcement authorities, which in the worst‑case scenario escalates into criminal proceedings for tax evasion, sham entrepreneurship, money laundering, and the use of forged documents.

As tax authorities increasingly apply analytical tools, automated data exchange, and financial monitoring, it is becoming ever more difficult to “hide” such models, and betting on aggressive optimization through “splitting” often proves more costly than transparent business structuring and timely alignment with legislative requirements.

How businesses should act under enhanced oversight.  In the current environment, the task of a responsible business is not only to avoid direct violations of the Tax Code, but also to build a model that will pass the “reality” test from the perspective of the Tax Service, the State Financial Monitoring Service, and banks. To this end, it is advisable to:

• Conduct an internal audit of the corporate structure and models of interaction with sole proprietors and counterparties in order to identify potential risks of being classified as “business splitting”.
• Clearly differentiate the activities of separate legal entities and entrepreneurs: different markets, different functions, different management centers, and sound economic justification for such a setup.
• Document the actual nature of services and works provided by sole proprietors and avoid situations where de facto employment relationships are disguised as external services.
• Implement a systematic compliance approach: tax risk policies, transaction monitoring procedures, and training for management and finance teams.

Sectors with a high share of cash transactions and extensive use of sole proprietors — retail, restaurants, hospitality, e‑commerce, delivery services, and service companies — require particular attention, as supervisory authorities already have established risk profiles and algorithms for detecting artificial business‑splitting schemes in these areas.

The role of legal advisers in risk mitigation.  In an environment where state authorities pursue a consistent policy of identifying and blocking “business splitting” schemes with multi‑billion turnovers, support from experienced legal and tax advisers is no longer optional but becomes an element of the basic security of a business.

Professional support makes it possible to:

• Timely identify risky elements of the structure,
• Develop lawful alternative business models,
• Prepare the business for potential tax and financial audits,
• Form a well‑reasoned legal position in the event of a dispute or criminal‑law claims.

If you have questions or issues related to your business structure, interaction with sole proprietors, or the risks of your model being classified as “business splitting”, you should promptly seek qualified legal and tax advice.

Author: Ihor Yasko, Managing Partner of the law firm “WINNER”, PhD in Law.