Seeking to increase budget revenues and counter aggressive tax optimization practices, the state — represented by the State Tax Service of Ukraine (STS) and the Economic Security Bureau of Ukraine (ESBU) — is increasingly focusing on identifying and suppressing so-called “business fragmentation” schemes. By this concept, controlling and law enforcement authorities generally mean the artificial division of a single business’s operations among multiple economic entities, particularly Sole Proprietorships (hereinafter — “SPs”) applying the simplified tax system, in order to reduce the overall tax burden and obtain tax advantages compared to the general taxation system.
Paradoxically, despite the state’s systematic fight against artificial business fragmentation, numerous tax audits, substantial amounts of additional tax assessments, and even the initiation of criminal proceedings regarding alleged tax evasion, Ukrainian legislation still lacks a statutory definition of the concept of “business fragmentation.” Furthermore, the legislator has failed to establish an exhaustive list of criteria that would allow for an unequivocal delineation between lawful tax optimization of economic activity aimed at reducing the tax burden, and bad-faith practices directed at obtaining unlawful tax advantages and evading taxes.
As a result of this legislative uncertainty, the presence or absence of indicators of business fragmentation is determined not on the basis of criteria clearly established by law, but through the prism of the risk-based approaches applied by the STS and the ESBU, as well as subsequent judicial evaluation of the relevant circumstances.
Consequently, understanding the approaches and criteria utilized by controlling and law enforcement authorities to evaluate the organizational structure of economic activity for indicators of artificial fragmentation is of paramount importance for businesses today.
What Do Controlling and Law Enforcement Authorities Look For?
One of the first documents to systematize the approach to identifying indicators of business fragmentation was Letter No. № 25-0005/82615[1] issued by the National Bank of Ukraine (NBU) on November 1, 2024.
In the said letter, the NBU pointed out that business fragmentation mechanisms can be used to artificially divide operations among multiple economic entities, particularly SPs applying the simplified tax system. To identify indicators of potential business fragmentation, the NBU suggested focusing on a combination of criteria that may evidence a de facto connection between a legal entity and the engaged SPs. Such criteria notably include:
- Instances where a single individual submits a package of documents to a financial institution to establish business relations with both a legal entity and SPs, including simultaneous submissions;
- A shared registered address of the legal entity and the SP;
- A shared location for the sale of goods and services (such as a store address or website);
- The legal entity and/or the SPs having shared owners, representatives, accountants, authorized persons, etc.;
- The SP typically lacking the necessary resources to conduct business, including activities performed in cooperation with the legal entity;
- Substantial receipts on the SP’s accounts from the legal entity or other economic entities within the Group;
- Payment by the legal entity for the SP’s services whose value is difficult to quantify (such as rent, marketing, information services, advertising, etc.);
- Provision of financial assistance by the legal entity to the SP;
- A significant volume of financial transactions on the accounts of a newly established SP;
- The SP conducting financial transactions over a short period of time (two to three months) for a total amount reaching the maximum annual income threshold permitted for the chosen taxpayer category;
- The use of a single payment terminal of a financial institution by multiple economic entities, among others.
Concurrently, the State Tax Service of Ukraine and the Economic Security Bureau of Ukraine utilize their own approach in their practical activities to identify instances of potential business fragmentation and to evaluate the actual relationships between economic entities.
In numerous[2] clarifications issued by the STS and the ESBU,1 business fragmentation is viewed as the construction of an organizational structure whereby formally independent economic entities operating under the simplified tax system de facto function as a single business in order to obtain tax advantages, namely: avoiding the payment of taxes that would arise if such activity were conducted by a single legal entity under the general taxation system.
An analysis of press releases from the State Tax Service of Ukraine and the Economic Security Bureau of Ukraine demonstrates that when identifying potential indicators of business fragmentation, controlling and law enforcement authorities notably pay attention to the following circumstances:
- The use of identical IP addresses to access client-bank systems and software software-based cash registers;
- A shared registered address;
- The maintenance of accounting records by the same employee;\
- The operations of multiple sole proprietors within the same commercial/retail premises;
- The use of a single trademark or brand;
- Shared owners (beneficial owners);
- The employment of shared personnel.
The aforementioned list of criteria demonstrates that when evaluating potential business fragmentation, controlling and law enforcement authorities focus not so much on the formal separation of economic entities, but rather on the actual nature of their operations and interrelations. Although most of these criteria are subjective in nature and do not automatically constitute a violation of tax legislation, practice shows that their presence and accumulation can serve as a ground for a more detailed analysis of the nature of interaction between the respective economic entities.
The Concept of Tax Abuse: What Does the Ministry of Finance Propose?
Currently, the indicators of potential business fragmentation are largely based on an evaluation of the factual circumstances of the taxpayers’ economic activities. However, in the near future, the approaches applied may be codified at the legislative level. This, in turn, will increase the level of legal certainty and allow for a clearer boundary between lawful business structuring and artificial fragmentation aimed at tax evasion.
At the end of February 2026, the Ministry of Finance of Ukraine published for public discussion a draft Law of Ukraine “On Amendments to the Tax Code of Ukraine Regarding the Implementation of Rules Against Tax Evasion Practices that Directly Affect the Functioning of the Internal Market of the European Union and Ukraine, in Accordance with Council Directive (EU) 2016/1164 of 12 July 2016”[3].
One of the most debatable innovations of the draft law is the introduction of the concept of “tax abuse” into the Tax Code of Ukraine (TC of Ukraine). While as of today the STS substantiates its findings primarily by referencing a combination of circumstantial indicators — such as shared personnel, shared premises, the use of a single brand, or centralized management, relying on its own risk-based approach — the introduction of the tax abuse concept could permanently shift the focus of analysis toward evaluating the business purpose of economic entities.
Pursuant to the draft law, tax abuse may be recognized where an individual transaction (arrangement, action), a combined transaction, or a series of transactions (arrangements, actions) that do not meet the criteria for recognition as a combined transaction, has as its main purpose or one of its main purposes, in light of all relevant facts and circumstances, the obtaining of a tax advantage by a taxpayer in the form of non-payment (underpayment) of taxes and/or an exemption from taxes or taxation, a reduction in tax liabilities, a deferral (alteration toward extension) of the deadlines for the occurrence and/or payment of tax liabilities, or the receipt of a tax refund or repayment, provided that the transaction (arrangement, action), combined transaction, or series of transactions (arrangements, actions) itself is artificial.
A transaction (arrangement, action), combined transaction, or series of transactions (arrangements, actions) shall be deemed artificial if such transaction (arrangement, action) or series of transactions (arrangements, actions) that do not meet the criteria for recognition as a combined transaction, lacks valid commercial reasons reflecting economic reality.
In other words, tax abuse may be recognized in a transaction and/or a combination of transactions whose primary objective is to obtain a tax advantage and which lacks independent economic justification. However, for taxpayers, the decisive factor will be not so much the proposed amendments to the definition of “tax abuse” in the TC of Ukraine, but rather the legal consequences that may follow the establishment of the fact of such abuse.
Firstly, it is proposed to significantly extend the statutes of limitations for making additional tax assessments.
The draft law provides for amending Paragraph 102.1 of Article 102 of the TC of Ukraine with a provision according to which, if the controlling authority establishes indicators of tax abuse by a taxpayer, the statute of limitations will be extended from the general three years to seven years.
The practical significance of this amendment can hardly be overstated. While today the tax authority is limited to analyzing a relatively short period of a taxpayer’s activity, in the future, establishing indicators of tax abuse will effectively open the door for a retrospective audit of the taxpayer covering a significantly longer timeframe, along with all the attendant consequences.
Secondly, the draft law provides for the possibility of revoking the right to apply the simplified tax system in the event of executing transactions that constitute tax abuse.
Specifically, the said draft law proposes to supplement the list of grounds for the mandatory abandonment of the simplified tax system by single tax payers of the first to third categories (Subparagraph 298.2.3, Paragraph 298.2 of Article 298 of the TC of Ukraine) with a new ground — the execution of transactions recognized as tax abuse.
Should the controlling authority conclude that a respective business model was aimed primarily at obtaining a tax advantage and lacked sufficient economic justification, the consequence could be not only additional tax assessments but also the loss of the right to apply the simplified tax system.
Furthermore, it is proposed to restrict the possibility of returning to the simplified tax system.
Pursuant to the amendments to Paragraph 299.6 of Article 299 of the TC of Ukraine proposed by the Ministry of Finance, an economic entity that executed transactions recognized as tax abuse will be ineligible to re-elect the simplified tax system if such transactions were conducted during the current and/or two preceding calendar years.
Fourthly, the draft law provides for the application of an increased tax rate of 30 percent on the income received by the taxpayer.
To this end, it is proposed to supplement the TC of Ukraine with new provisions (adding Paragraph 167.6 to Article 167 and Paragraph 293.10 to Article 293) under which income derived from tax abuse will be taxed at a 30 percent rate.
Fifthly, a taxpayer may lose the right to tax benefits and preferences.
According to the proposed amendments to Paragraph 30.3 of Article 30 of the TC of Ukraine, a taxpayer shall not be entitled to utilize tax benefits if the right to receive them arose as a result of tax abuse.
What Should Businesses Focus on Today?
In light of the aforementioned approaches applied by the STS and the ESBU, and considering the legislative initiative of the Ministry of Finance of Ukraine, businesses whose economic operating models are built around the involvement of multiple economic entities would be well-advised to conduct an internal audit of their structure today to detect any criteria that could be perceived as indicators of artificial fragmentation.
First and foremost, attention should be paid to the matter of the actual independence of each economic entity involved in the respective structure. The existence of their own functions, resources, managerial decisions, and economic reasons that justify the participation of each entity in the joint economic activity is becoming of paramount importance.
Separately, it is worth noting that the use of shared personnel, premises, equipment, trademarks, websites, payment infrastructure, or other resources does not in itself constitute a violation of legislation. Concurrently, however, it is precisely these circumstances that controlling and law enforcement authorities frequently view today as potential indicators of operating a single business through multiple formally independent economic entities.
Given the tax abuse concept proposed by the Ministry of Finance, it is not merely formal compliance with legislative requirements that will become increasingly critical, but rather the economic substance of the operations. In this regard, businesses should evaluate their own organizational and commercial decisions not only from the standpoint of their legal lawfulness but also in terms of the existence of real, objective economic reasons and the business purpose behind their implementation.
Such an approach will enable businesses to identify potential risks proactively and, if necessary, adjust their organizational operating structure in advance, without unwanted interference from controlling and law enforcement authorities.
[1] https://bank.gov.ua/ua/legislation/Notice_01112024_82615
[2] https://od.tax.gov.ua/media-ark/news-ark/981136.html, https://ck.tax.gov.ua/media-ark/news-ark/959711.html, https://ch.tax.gov.ua/dlya-gromadskosti/vzaem-z-gromadskist/informatsiyni-materiali/964264.html, https://od.tax.gov.ua/media-ark/news-ark/962052.html, https://esbu.gov.ua/news/droblennia-biznesu-na-fopy-beb-likviduvalo-v-odesi-skhemu-na-11-mln-hrn-ukhylennia-vid-splaty-podatkiv, https://esbu.gov.ua/news/beb-zabezpechylo-vidshkoduvannia-237-mln-hrn-nesplachenykh-podatkiv-u-spravi-pro-droblennia-biznesu-merezheiu-supermarketiv and others.