On February 9, 2025, a conference entitled “De-shadowing Trade: Fragmentation, Declining Turnover, and Envelope Salaries” was held in Kyiv, organized by the Ukrainian Business Council in conjunction with the EBA and ACC.

The event was attended by members of the Ukrainian parliament, the acting head of the State Tax Service, representatives of the Economic Security Bureau, leading industry associations, and economic experts. Participants discussed international experience in combating the shadow economy, in particular “fragmentation” schemes, and proposed specific tools for de-shadowing the retail and restaurant industries.

Volodymyr Dubrovsky, senior economist at CASE-Ukraine, presented the results of a large-scale study of international experience in combating business fragmentation. According to his data, budget losses from fragmentation schemes in Ukraine amount to 14-19 billion hryvnia per year. The expert emphasized that fragmentation on the SSO is not a unique problem, and there are effective ways to counteract it without destroying special tax regimes.

V. Dubrovsky proposed introducing criteria for identifying pseudo-individual entrepreneurs, as well as prohibiting individual entrepreneurs from cooperating with their former employers, establishing thresholds depending on the number of employees, and imposing fines for the work of pseudo-individual entrepreneurs. He paid particular attention to the need to reboot the financial monitoring service and introduce risk-oriented fiscalization.

Yaroslav Zheleznyak, first deputy chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, noted the lack of official communication with the Ministry of Finance regarding new tax initiatives. He described the situation from the perspective of an average member of parliament: “There is a lot of information that the IMF and partners want to bring order to the sole proprietorship system. The government says it knows and understands how to do this, but members of parliament outside the relevant committee are unaware of the Cabinet’s plans.”

Mr. Zheleznyak called on the business community to be more active in expressing their opinions and specific proposals, as it is the public position of the industries that can influence the decisions of parliamentarians. He also supported the idea of developing clear criteria for fragmentation and restarting financial monitoring.

Oleksandr Kovalchuk, Deputy Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, emphasized the complexity of the situation for MPs, who must take into account the IMF’s requirements while not destroying small businesses. He stressed the importance of expert opinion and alternative proposals.

Mr. Kovalchuk also drew attention to the critical problem of the shadow market for tobacco cultivation, where the ratio of legal to illegal cultivation of raw materials is one to twenty, resulting in budget losses of tens of billions of hryvnia. To resolve the problem with tobacco raw materials, draft law No. 14245 was developed in conjunction with the Government, the State Tax Service, the State Border Guard Service, and experts, and was supported by the Committee for the first reading.

Olga Vasilevska-Smaglyuk, deputy chair of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, shared some alarming statistics: over the course of the year, the National Bank terminated business relations with more than 80,000 clients due to their involvement in drop schemes. She also reported on a new threat—drop-outs who are sole proprietors and can funnel millions of hryvnias through themselves: “The annual limit for the third group in the 26th year exceeds UAH 10 million, which allows a single sole proprietor to funnel through themselves amounts of funds equivalent to hundreds of ordinary cards.”

In today’s reality, modernization of the tax system is truly necessary to find additional internal resources for the state, but every change must be as carefully considered as possible and implemented only after detailed consultations with all interested parties,” said MP Olga Vasilevska-Smaglyuk.

Lesya Karnaukh, acting head of the State Tax Service of Ukraine, shared specific results of the work: in 2025, the State Tax Service conducted nine large-scale investigations into fragmentation schemes, the results of which were subsequently forwarded to the BEB. She emphasized that the criteria for identifying pseudo-individual entrepreneurs are already being actively applied by the tax service, but the service does not always have sufficient legislative powers: “Incomplete implementation of Directive 112 and the lack of necessary tools in legislation limit the capabilities of the State Tax Service.”

Ms. Karnaukh stressed the importance of a preventive approach and risk-oriented work: the tax service focuses on large businesses that use sole proprietorships to minimize taxes, rather than pursuing each individual entrepreneur. She also spoke about the successful practice of dialogue with business, where companies are given time to change their financial model, provided they comply with minimum rules: market wages, full fiscalisation of operations and refusal to use sole proprietorships on a massive scale — and it works.

Grigol Katamadze, president of the Taxpayers Association of Ukraine, criticized the government’s position on introducing VAT for all sole proprietors with revenues of 1 million hryvnia or more. He cited an example from a European Union conference, where Ukraine’s deputy prime minister said that “Ukrainian business has become complacent,” while Lithuania’s finance minister advised against blindly copying European experience and instead adapting it to the realities of the country. Katamadze emphasized: “99% of sole proprietors still work honestly. Why should 99% be punished because of one percent of all sole proprietors?”

He called for a focus on combating the shadow economy, rather than raising taxes and complicating administration for everyone.

Boris Emeldesh, president of the All-Ukrainian Professional Association of Entrepreneurs, supported the position on the need to fight criminals in a targeted manner instead of punishing all small businesses. He stressed the importance of introducing tools that will allow the state to effectively identify violators.

Mr. Emeldesh called for “Let’s go down the path of targeted de-shadowing, rather than raising taxes. We need to focus on the violators themselves, rather than destroying small businesses under the guise of fighting them.”

Myroslav Laba, an expert at the Economic Expert Platform, presented a detailed study of six sectors of the economy with specific data on discrepancies in wages and tax burdens. According to his data, the largest source of budget losses is envelope wages (UAH 200-265 billion per year), followed by smuggling and gray imports (UAH 105-120 billion), and excise goods (UAH 40 billion). Fragmentation schemes through sole proprietorships account for UAH 10-13 billion. Mr. Laba provided specific examples: in the restaurant industry, wages range from UAH 45-50 thousand in international chains (KFC, McDonald’s) to UAH 10-15 thousand in domestic establishments.

The situation is similar in food retail, security, and electronics trade. The expert emphasized the need for data transparency and the creation of analytical systems for automatic detection of anomalies.

Eduard Golodnitsky, president of the International Advisers Association, proposed implementing the DAC-6 directive, which has been in force in the EU for almost 10 years. According to this directive, accountants, tax advisors, and law firms are required to report aggressive tax planning schemes. If the Ministry of Finance approved a list of such schemes (including fragmentation through sole proprietorships), this would create compliance for companies and reduce the spread of shadow practices.

Yuriy Peroganych, head of the Association of Information Technology Enterprises of Ukraine, drew attention to a critical problem in the trade of energy equipment (inverters, batteries). According to him, more than 60% of the $627 million in imports pass through one-day companies with one employee and a statutory capital of 20,000 hryvnia. These companies are actually engaged in commercial activities, but they take advantage of customs payment privileges intended for legal entities and individuals who purchase equipment “for themselves.” Peroganych called for the creation of a level playing field: either restore VAT and customs duties for all importers, or remove them for everyone.

Oksana Zgur’eva, chairwoman of the Business Help association, analyzed the specifics of the restaurant industry in detail and proposed specific changes. She pointed out the main loophole—the second group of the single tax, which allows earning more than 7 million hryvnias while paying only 7,800 in taxes, while the third group has to pay 420,000 for the same income—56 times more. Ms. Zgurieva proposed to significantly limit the use of the second group in the restaurant industry and establish a proportional distribution of income throughout the year.

Taras Kovalchuk, head of the National Restaurant Association of Ukraine, announced cooperation with the Ministry of Economy on developing a new taxation concept for the restaurant industry. The association supports the rejection of the second group of individual entrepreneurs in the restaurant business, but insists on a comprehensive approach that will include not only changes in taxation, but also new forms of employment (similar to mini-jobs in Germany and seasonal work in Spain). Kovalchuk also proposed allowing third-group sole proprietors to obtain alcohol licenses, which would simplify administration and enable the sale of Ukrainian craft alcohol directly in restaurants.

Tetyana Koschuk, an expert at the Growford Institute, noted that VAT for sole proprietors with revenues of 1 million hryvnia or more is a bad idea, and that 4 million hryvnia would be an adequate threshold for transitioning to VAT. Tetyana also drew the attention of government officials to the electronic cigarette market, where the shadow economy accounts for more than 90% of the market.

Tetyana Potopalskaya, a taxation expert, reminded about the requirements of European integration: Directive 112 provides for a maximum limit for the simplified VAT scheme – 85 thousand euros, no more. At the same time, she suggested using the “group VAT payer” tool provided for in Directive 112: when 150 sole proprietors, formally separate but interconnected, qualify as a single VAT payer. This will make fragmentation schemes economically unprofitable. Ms. Potopalskaya also noted that the experiment with special wage taxation regimes did not work fully – a significant part of IT specialists continue to work through the simplified system as sole proprietors.

Andriy Solomin, director of the All-Ukrainian Association of the Electronic Cigarette Market, raised the issue of schemes in online commerce. In his opinion, the online segment is becoming a new haven for shadow schemes, since it is possible to change an individual entrepreneur in an online store with just two clicks, without renting premises or other infrastructure. Solomin called for the development of special mechanisms to control online trade.

Konstantin Globa, lawyer and managing partner of the GLOBE & GLOBE association, proposed a specific legal solution: to amend Article 212 of the Criminal Code (tax evasion) by providing clear criteria and liability for dropping and fragmentation. In his opinion, this would resolve the issue without the need to introduce VAT for all sole proprietors. Mr. Globa also stressed the importance of clarifications from the Prosecutor General regarding the investigation of such cases and from the tax service regarding the criteria for detection.

Natalia Artemchuk, representative of the European Business Association, stressed the need for careful planning of the transition period in case of any changes to the taxation of sole proprietors, referring to the negative experience of the transition from 2% turnover to VAT. She also noted that the association’s official position does not specify a specific limit for sole proprietors, but member companies are open to discussion and believe that one million hryvnia is too little for today’s realities.

Following the conference, participants agreed on the need to de-shadow the economy by introducing clear criteria for identifying schemes and a risk-based approach.

Representatives of the business community agreed to continue the dialogue and prepare a consolidated position to be presented to the Verkhovna Rada and the Ministry of Finance as an alternative to plans to introduce VAT for all sole proprietors with a minimum threshold.