To the President of Ukraine

To the Verkhovna Rada of Ukraine

To the Cabinet of Ministers of Ukraine

To the Ministry of Finance of Ukraine

To the Ministry of Economy, Environment, and Agriculture of Ukraine

To the National Bank of Ukraine

 

Regarding the Proposed Model for Compensating War-Related Business Losses
and a Possible Increase in the VAT Rate to 21%

Dear Ladies and Gentlemen!

The Ukrainian Business Council, which brings together 132 leading business associations in Ukraine, supports the need to find a systematic solution to protect businesses from catastrophic losses caused by Russian shelling. For many businesses, the destruction of a production site, warehouse, equipment, or other key asset means not just a one-time loss, but the loss of the ability to continue operations, jobs, tax revenues, and investments. The problem requires government involvement, since in the context of a full-scale war, the capabilities of the conventional insurance and international reinsurance markets are objectively limited.

At the same time, the scale of the problem requires a particularly careful approach to determining who should finance the relevant mechanism, which businesses will receive funds, what portion of the risk they must bear on their own, and how economic fairness for other taxpayers should be ensured. That is precisely why the business community’s concern stems not from the very idea of state participation in covering catastrophic war-related losses, but from the proposed sequence of its implementation.

According to parameters publicly announced by representatives of the government and the Ministry of Economy, the creation of a special fund is being considered to compensate for the first tier of losses incurred by businesses due to war risks. Among the preliminary conditions mentioned are a corporate contribution of approximately 2% of a specified base, maximum compensation ranging from approximately $5 million to $10 million per legal entity, an initial government allocation of approximately $1 billion, and the mobilization of additional international financing. One proposed source of the government’s contribution is an increase in the standard VAT rate from 20% to 21%. At the same time, the program’s parameters themselves continue to evolve: public statements simultaneously mention “first loss” coverage, compensation up to a specified limit, and reimbursement of approximately 40–50% of losses.

In fact, the issue has already moved beyond a discussion of a specific business support program. It concerns a possible indefinite increase in one of the country’s main national taxes, the economic burden of which will largely be borne by end consumers, non-VAT payers, and businesses that cannot fully claim a tax credit. According to experts from the Ukrainian Business Council, a decision of this magnitude cannot be made until the viability of the model itself has been demonstrated, the actual demand from businesses has been confirmed, the risk allocation has been calculated, the rules for businesses’ own contribution to the losses have been defined, and the effective use of state resources has been demonstrated.

Is there sufficient effective demand for a program with a 2% contribution?

Any mechanism based on voluntary participation by companies depends not on their general interest in protection against war risks, but on their willingness to actually pay the set price for a specific level of coverage. These two things are not the same. The cost of participation directly affects demand: all other things being equal, the higher the contribution, the fewer companies are willing to pay it.

The current program, introduced by Resolution No. 1541 of the Cabinet of Ministers of Ukraine dated November 28, 2025, already provides insight into how businesses behave in practice. To receive direct compensation for property in high-risk areas, a business voluntarily joins the program and pays a one-time contribution of 0.5% of the declared amount of probable loss, with the maximum compensation set at 30 million UAH. As of September 4, 2026, 605 applications had been submitted, 315 had been approved, and only 7 applications had been filed directly for compensation following the occurrence of a loss. Under another provision of the same resolution—compensation for a portion of the insurance premium under war risk insurance contracts—186 applications were submitted.

These data do not indicate that businesses have no need for protection against military risks. But they certainly do not support the assumption that companies are widely willing to pay to participate in such a system. If, with a contribution of 0.5%, participation is measured in the hundreds of companies, then raising the participation fee to 2% does not in itself provide any reason to expect tens of thousands of participants. On the contrary, given the elasticity of demand and all other things being equal, the number of willing participants should decrease, especially when 2% translates for a specific company not into an abstract percentage, but into millions or tens of millions of hryvnias in annual contributions.

Actual insurance market statistics reveal the same problem. According to data from the PRIMA (NASU) information exchange, 17 insurance companies issued 185,900 policies covering war risks in the first half of 2026. However, this overall figure is not very informative for evaluating the future program, since the majority of policies cover automobiles, individuals, life, health insurance, cargo, and other risks. In the segment most closely related to the assets the new fund is intended to protect—property insurance for legal entities—only 456 policies were issued over the six-month period. Of these, 228 required individual underwriting for a specific property, and these policies accounted for 98.8% of corporate premiums in this segment.

Thus, there is undoubtedly a need to protect large corporate assets, but the actual scope and scale of such protection remain very limited. At this time, there is no reason to believe that the new mechanism with a 2% contribution will automatically create a large pool of participants.

A voluntary program with a flat rate creates adverse selection

Under a voluntary program, companies with different risk levels will assess the same contribution differently. For a company in a relatively safe region, with several dispersed sites, physical security, and a low concentration of assets, a 2% contribution may be economically unprofitable. For a company with a high concentration of assets in a location that is regularly subjected to attacks, the same rate may be very attractive. Therefore, the program will naturally attract, first and foremost, the highest-risk companies with the highest expected probability of receiving compensation.

This is a direct manifestation of adverse selection. It leads to the worst risks becoming concentrated in the fund, and the expected loss ratio grows faster than the number of participants. As a result, the general public finances, through the VAT, the risk of a narrow circle of enterprises, while the potential beneficiaries themselves do not form a sufficiently broad pool for the proportional distribution of losses among those who are actually eligible for compensation.

This is where the issue of economic fairness arises. The economic burden of raising the standard VAT rate will largely fall on end consumers, non-VAT payers, and businesses that are unable to claim a full tax credit. At the same time, according to the publicly described model, only businesses that meet the program’s conditions and pay a contribution will be eligible for compensation. The possibility of participation by individual entrepreneurs has not been specifically addressed, as the maximum compensation amount in the official description is set per legal entity. The property, vehicles, lives, and health of citizens, as well as the assets of a significant portion of micro- and small businesses, may be excluded from the proposed mechanism.

Assuming prices remain unchanged excluding VAT, an increase in the standard rate from 20% to 21% will result in an approximate 0.83% increase in the final price. However, for individual entrepreneurs and other business entities that are not VAT payers, the VAT amounts included in the cost of purchased goods, works, and services do not constitute a tax credit but are instead included in their expenses. Therefore, even a formally insignificant rate increase will raise the cost of doing business for such entities. This impact will be particularly noticeable for entrepreneurs who work with end consumers and have limited ability to pass on the additional costs to the price.

Special attention should be paid to the accessibility of the future mechanism for microenterprises and sole proprietors. The official description of the initiative mentions the participation of small businesses, but the maximum compensation amount is set per legal entity. This does not provide a clear answer as to whether individual entrepreneurs who are not legal entities will be able to participate in the program, nor whether the terms of participation will be economically feasible for microbusinesses. A flat contribution rate of 2% without minimum coverage limits, simplified asset valuation, and a proportional procedure could effectively gear the mechanism primarily toward enterprises with high-value fixed assets.

Thus, the proposed structure distributes the financial burden across the broadest possible range of taxpayers, while the potential benefits are concentrated among a much narrower group of private asset owners. Such a redistribution can be justified only if its macroeconomic effectiveness is proven, if there are no better alternatives, and if the risk is fairly distributed among the participants.

The asset owner must bear a portion of the loss and have an incentive to reduce risk

The final mechanism of the future program has not yet been determined. In public statements, government officials have simultaneously used the term “first loss,” mentioned compensation for approximately 40–50% of the loss, and cited a maximum limit of 5–10 million U.S. dollars. Therefore, until a complete model is available, it is impossible to determine what the deductible or other form of the enterprise’s own retention will be.

At the same time, the absence of an economically significant financial contribution by the owner toward the loss creates the wrong incentive. If the first layer of losses is compensated by the state almost automatically, the enterprise has less financial incentive to invest in the decentralization of warehouses and production facilities, backup sites, fortifications, the relocation of the most valuable equipment, the redundancy of critical systems, and other risk management measures. In an extreme situation, the same asset, after being restored, could be struck again and qualify for compensation a second time.

Co-payment is also necessary from an administrative standpoint. If the program does not have a deductible or a minimum loss threshold, a large number of minor claims would go through the same assessment, verification, and payment process as major catastrophic losses. Since minor and moderate claims are typically more numerous, they can overwhelm the program administrator and effectively block the prompt disbursement of funds to businesses for which a major loss poses a threat of business closure.

The source of state funding requires separate justification

The government has publicly stated its intention to establish the state portion of the fund at approximately $1 billion and to attract additional resources from international partners to bring the total volume to $2–3 billion. At the same time, the state budget is already operating under conditions of a significant deficit and a priority need to fund defense, security, and payments to military personnel. Warnings have repeatedly been voiced in the public sphere about an acute shortage of budgetary resources, even for current critical needs such as funding the military and paying military salaries.

Against this backdrop, the assumption that it is possible to secure an additional 2–3 billion U.S. dollars in external grant funding specifically for non-repayable payments to private companies requires separate documentary evidence. International partners finance a wide range of Ukraine’s urgent needs, and any borrowed funds raised through international financial mechanisms must subsequently be repaid by the state. Therefore, it is necessary to clearly distinguish between grant funds, loans, guarantees, and other instruments, and not to present potentially available borrowed funds as an already established non-repayable fund.

It is important to address whether it is economically justified to raise the VAT rate nationwide before it has been demonstrated that the new program will have a sufficient number of participants, rather than becoming a financing mechanism for a relatively small number of the highest-risk large enterprises.

The fund must have rules in place for the event of a funding shortfall and a transparent disbursement mechanism

War risks may materialize unevenly: one or more massive attacks could, within a short period, cause losses that significantly exceed average annual expectations. If the fund has limited resources, it is necessary to determine in advance what will happen if the amount of confirmed losses exceeds the available funds.

A business that paid its contribution and suffered a loss in February, and a business with the same terms of participation that loses property in October, should have equally clear rights. Otherwise, a situation may arise where the first recipients effectively deplete a significant portion of the fund, while those who are unlucky enough to suffer losses later will have their compensation reduced or become ineligible for it altogether. Therefore, even before the program is launched—if it is approved—it is necessary to define the procedure for setting aside funds, the order of payments, the rules for a possible proportional reduction in compensation, the source of additional liquidity, and the maximum amount of the state’s liabilities.

Equally important is the mechanism for assessing losses. When potential payments to private enterprises amount to tens of billions of hryvnias, the valuation of destroyed assets, the verification of the causes of loss, and the decision to grant compensation cannot depend on the opaque discretion of individual officials. The system must provide for uniform assessment rules, independent appraisers, electronic tracking of claims and decisions, prevention of double compensation, oversight of related parties, independent audits, and the ability to subsequently verify the use of funds.

Ukraine already has a number of programs for allocating budget resources to support businesses, which have had a significant public relations impact but have not always yielded comparable, measurable economic results. A new program of this scale should be evaluated not by the amount of funds allocated or the number of public statements, but by how much economic activity, jobs, investment, and tax revenue it actually preserves per unit of budget resources.

First, the proposed model must be thoroughly reviewed

The Ukrainian Business Council assumes that the very need for state participation in covering catastrophic war risks is beyond doubt. The question is which model will allow the same limited state resources to protect the greatest volume of economic assets without placing an excessive burden on citizens and businesses and without undermining owners’ incentive to mitigate risks.

One possible approach could be for the government to subsidize a larger portion of the insurance premium and help create additional reinsurance capacity, whereby budgetary resources support a significantly larger volume of insurance coverage, while risk and loss assessment is carried out by the professional insurance market. Such a model does not eliminate the need for significant government involvement in wartime, but it allows a single budgetary resource to support a much larger volume of private coverage than would be possible through direct, non-repayable funding of each individual loss.

For businesses that have already suffered catastrophic losses and were unable to obtain sufficient insurance coverage, long-term preferential loans, repayable financial assistance, and other instruments may be applied in parallel. These measures enable the rapid restoration of production and jobs, but once the business has stabilized, they allow for at least a partial repayment of state resources. Non-repayable compensation may also be necessary, but its amount and terms should be based on economic calculations rather than automatically serving as the primary means of restoring large private assets.

Before making a final decision on the program’s funding sources, it is necessary to publicly present its complete financial and economic model and conduct a limited pilot. Such a pilot should last no more than six months and be funded within the limits of already available government and partner resources, without a prior permanent increase in the VAT rate.

The Ukrainian Business Council proposes:

1. not to raise the VAT rate from 20% to 21% to finance the proposed program until a full-scale simulation and pilot launch of the mechanism have been conducted;
2. to publish the program’s complete financial and economic model, including a forecast of the number of participants, the geographic and sectoral distribution of risks, the maximum possible loss, scenarios for large-scale attacks, and the adequacy of the fund and its liquidity;
3. conduct a representative study of businesses’ actual willingness to pay a 2% contribution, taking into account asset value, the required limit, location, type of activity, and an acceptable level of self-participation in losses;
4. confirm the sources and terms of international financing, distinguishing separately between grant, loan, and guarantee instruments;
5. alongside direct compensation for losses by the state, make broader use of state reinsurance, long-term preferential lending, and other instruments that enable the mobilization of private capital and, where possible, ensure the return of state resources.

The Ukrainian Business Council is ready to participate in the development and testing of such a model together with representatives of the Government, the Verkhovna Rada of Ukraine, the National Bank of Ukraine, the insurance and reinsurance markets, international financial organizations, and independent experts in catastrophe risk management.

 

Sincerely,

Members of the Ukrainian Business Council