Use of sole proprietor funds for private needs: how to stay within the law

Under Ukrainian law, funds in an individual entrepreneur’s account are considered business income, but they cannot be used without restrictions for personal needs. The main rule is that personal expenses are allowed only after officially withdrawing profit: transferring money from an individual entrepreneur’s account to a personal card with the correct payment purpose (“payment of net income after taxes are paid”).

Legal basis and NBU interpretation
Since 2020, the NBU officially allows FOPs to use funds from the business account for personal needs under two conditions:

• payment of all taxes and USC due on the income;
• transferring funds from the business account to the individual’s personal account or another personal card.

This means profit can be withdrawn and spent on personal needs, but direct payment of personal expenses from the FOP account is a gross violation and carries tax risks. Payment of personal purchases, utilities, or loans directly from the FOP account is treated by the tax authority as undeclared income and may trigger additional personal income tax (18%) and military levy (5%).

Risks and supervision by tax authorities and banks

• Direct payment of personal needs from the FOP account is often considered tax avoidance.
• The bank may block the account for suspected money laundering or non-compliance with financial monitoring rules.
• Funds spent “not for business” are subject to personal income tax and military levy with all applicable penalties.

Practical advice for FOPs

1. Always transfer money to a personal card before using it for personal needs.
2. Specify the payment purpose clearly: “Payment of income from business activity after tax payment.”
3. Pay all taxes and levies before transferring funds.
4. Do not pay for personal purchases or loans directly from the FOP account.
5. If paying other individuals, withhold and pay personal income tax and military levy as a tax agent.
6. Consult regularly with an accountant or tax consultant to avoid risks.

Specifics of settlements with other FOPs and individuals
Paying funds from a FOP account to another FOP for personal, not business, purposes is also questionable and requires additional accounting and tax justification. The recommendation is first to transfer money from the business to the personal account, then pay for personal services or purchases.

Consequences of violations
Penalties for misuse of funds can be substantial—ranging from self-assessed personal income tax and levies to criminal responsibility for significant sums or deliberate concealment of income.

Conclusions
A Ukrainian FOP can lawfully use business profits for personal needs, but only after fulfilling tax obligations and transferring funds from the business account to a personal card. Direct payment of personal expenses from the FOP account is risky and may lead to tax sanctions and bank blocking. It’s best always to document all transactions and keep personal and business finances separate.

Author — Maksym Bahniuk, Head of Tax and Customs Law Practice at the Law Firm “WINNER”.