Artificial registration of employees as sole proprietors: risks and tax control 2025

One of the most controversial topics in Ukrainian tax compliance in recent years is the artificial registration of employees as sole proprietors (FOPs). For many companies, this appeared to be a legal way to optimize tax burdens, but the tax authorities have increasingly reclassified such arrangements as employment relations, imposing million-hryvnia fines. In 2025, this practice will remain a priority for the fiscal authorities.

The essence of the “employee = sole proprietor” scheme
This scheme is based on substituting official employment (with wages and taxes — USC, PIT, military levy) by signing a civil law contract and registering the worker as an FOP. As a result, the employer saves up to 40–45% of payroll tax, while the “FOP-employee” pays only the single tax (5% of income or 3%+VAT) and minimum USC.

At first glance, both sides win: businesses cut their tax burden, and workers receive “net” money. But for the state, this leads to direct tax losses and social insurance payment shortfalls. That is why this scheme is officially designated one of the “risky” models that tax authorities systematically track.

How the tax authorities spot disguised employment
The tax office looks not only at formal contracts, but at the actual substance of relations. It especially focuses on signals typical of employment:

• subordination to internal company rules;
• fixed working schedule and office location;
• use of corporate email, equipment, and internal tools;
• regular monthly payments of equal sums;
• lack of entrepreneurial risk or other clients;
• management of processes by a company manager.

If even a few of these are confirmed during an audit or bank inquiry, tax authorities can prove the existence of employment relations. In this case, the company is deemed the legal employer, obliged to pay back taxes — PIT (18%), military levy (5% since 2025), and USC (22%) for the past three years.

Sanctions for companies and “FOP-employees”
The tax service has the right to apply a suite of financial and administrative penalties:

• back taxes unpaid for up to three years;
• a fine of ten minimum monthly wages for each undeclared worker (over 100,000 UAH);
• no way to avoid USC charges even for closed FOPs;
• compensation owed to the government budget and the pension fund.

Such cases are already being adjudicated, and the tax office increasingly wins. The key position is that a “service contract” does not eliminate the signs of employment if the worker is, in fact, functioning like a regular employee.

“Separation of Functions” principle: how to avoid trouble
Lawyers recommend firms that honestly cooperate with FOPs always follow the separation-of-functions principle:

1. Allow the contractor to choose how and when work is performed; contracts should not describe working time or location.
2. Stipulate the FOP’s own risk and responsibility; the contract should clarify independent provision of equipment or materials.
3. Clearly define the subject; it must be a service or result, not a “position” or “employee function.”
4. Payment must be linked to outcome; regular fixed payments are treated as wages.
5. Ensure the FOP has other clients. Exclusive cooperation with a single company greatly increases requalification risk.

Who will be checked first
After the moratorium on inspections was lifted in 2025, several risk groups were targeted:

• companies with large FOP teams using the simplified tax system;
• IT, consulting, and marketing agencies where “FOP-employees” are over 70% of workforce;
• firms making regular payroll-like payments to the same FOP accounts;
• businesses with court cases or tax queries regarding employment relations;
• risky or tax-evading contractors.

The IT sector, which widely uses the “contractor agreement” model, is particularly under scrutiny. Tax authorities now actively analyze payment structures and income sources, especially if FOPs have no other clients.

Legislation change and European trends
In 2025, Ukraine moves towards EU labor norms. The European Commission defines “fake self-employment,” roughly equivalent to Ukrainian standards. Platforms, freelancing, and start-up models are under special attention.

The Ministry of Economy and Ministry of Social Policy are preparing a draft law on “economic dependency”—an intermediary status between employment and sole proprietorship. This should reduce pressure on small businesses while protecting the rights of actual FOPs within companies.

Court practice
The courts are increasingly ruling for the tax service when subordination is clear. In precedents from 2023–2025, labor relations between companies and FOPs were established where:

• fixed schedule and outcome control exists;
• long-term cooperation with no opt-out;
• use of corporate communication and tools;
• payments twice a month in fixed amounts.

Positive verdicts for businesses also occur if the firm proves the existence of genuine contracts for clear project deliverables, with no control over working hours.

Business impact
The “employee = FOP” model is a direct response to the high tax burden on official payrolls. In the real sector, payroll tax exceeds 40%, pushing companies towards workarounds.

The state is increasing not just business inspections, but also oversight of banks, which must report regular transactions between business entities. In 2026, an automated risk-analysis system is anticipated to spot pseudo-FOPs, similar to the VAT invoice blocking model. The aim is not to kill entrepreneurship but to balance the tax load between real businesses and “gray” payroll schemes.

Conclusions
The “employee = FOP” formula has long been one of the most common optimization models. In 2025, the tax service makes it target number one in audit programs, taking any sign of subordination as proof of employment. The trend is clear: the state wants transparent, unified rules—entrepreneurship should mean independence, not just tax minimization. For business, the priorities now are transparent contracts, legally justified FOP relations, and real compliance standards—or tax authorities may treat ordinary contracts as a basis for million-hryvnia assessments.

Yulia Popadyn — attorney at tax and customs, “Winner” Law Firm. For questions about tax inspections, payment optimization, FOP contract structure or legal defense in employment and business disputes, contact the attorneys and tax experts of “Winner” Law Firm. Sound legal advice and timely contract audits are the keys to secure business in today’s tax environment.