The International Monetary Fund (IMF) has shown understanding of the sensitivity around introducing value-added tax (VAT) for sole proprietors (FOPs), according to First Deputy Prime Minister Yulia Svyrydenko. Reporting on the results of the IMF Spring Meetings in Washington, Svyrydenko said partners recognize the initiative is a non-constructive idea and are looking for alternatives.
The reform, which would require small businesses to register as VAT payers, was initially a prior action under the $8.1 billion IMF program before being moved to a structural benchmark. The proposal is part of a broader effort to bring the shadow economy into the open and ensure budget sustainability. It faced resistance from the Ukrainian public and business community, who argued that the added tax burden and reporting requirements could stifle small-scale entrepreneurship.
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During the high-level meetings in Washington, Ukrainian officials worked to explain these domestic challenges to international partners, seeking a more flexible approach to the reform.
“We found understanding with our partners that this [introducing VAT for sole proprietors] is indeed a sensitive topic, as the President has repeatedly said to IMF representatives,” Svyrydenko said on Telegram. She added that Ukraine will continue working with the Fund on alternative measures to secure the revenue side of the 2027 budget.
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A source familiar with the negotiations told Kyiv Post that VAT for FOPs has not been canceled, but the “format and timing” are expected to change. Details on the final configuration of the reform will be discussed during an upcoming IMF mission to Kyiv, planned for early summer.
Evolution of the VAT proposal
The Ministry of Finance has published two versions of this reform on its website. The first draft set the VAT registration threshold at Hr.1 million ($22,720).
The second, more recent draft was published as a comprehensive tax package. In addition to VAT for FOPs, it included three other prior actions under the IMF program – all of which Ukraine was required to fulfill by the end of March. To improve the chances of parliamentary approval, the government split the bill into four separate pieces of legislation. Two have made progress:
- In April, Ukraine’s parliament, the Verkhovna Rada, approved a law extending the military levy for three years after the war ends. It has been signed by President Volodymyr Zelensky.
- A bill to implement the EU’s DAC7 directive, which would tax income earned through digital platforms such as Uklon, Bolt and OLX, passed its first reading and has been sent back for revision before a final vote.
- Legislation to introduce VAT on international parcels valued at under €150 ($176) is registered for parliamentary consideration but has not yet been approved by the Cabinet of Ministers.
- The fourth and most contested measure – VAT for sole proprietors – was published by the Ministry of Finance for stakeholder consideration in March. It has not been approved by the Cabinet or registered with parliament.
The second draft raises the annual income threshold for FOPs on the simplified tax system to Hr.4 million ($90,900), effective Jan. 1, 2027. To ease the transition, the Ministry proposed quarterly reporting and symbolic fines of Hr.1 ($0.02) for the first five violations in the first year.
Ukraine’s sole proprietor system
Ukraine’s simplified tax system for sole proprietors is divided into three main categories based on annual income and tax rates:
- Groups 1 and 2 are small-scale entrepreneurs in retail and services with annual income up to Hr.6.6 million ($150,000). They pay a fixed monthly unified tax of up to Hr.1,600 ($36) and a flat military levy of Hr.800 ($18). Group 1 entrepreneurs have no employees; Group 2 may have up to 10.
- Group 3 covers service providers and IT specialists with income up to Hr.9.3 million ($211,000). They pay 5% of their total revenue as a unified tax plus a 1% military levy.
- Group 4 consists of farmers and agrarians, whose taxes are calculated based on land area.
All sole proprietors must pay a minimum Unified Social Contribution (ESV) of Hr. 1,760 ($40) per month.
Entrepreneurs outside the simplified system pay 18% personal income tax and a 5% military levy on net profit. If the proposed reform is adopted, those earning above Hr.4 million ($90,900) would also pay an additional 20% VAT.
Business and political pushback
The proposal drew strong opposition from Ukraine’s business community and lawmakers on both occasions it was published. A petition on the Cabinet of Ministers’ website calling for its withdrawal gathered the required 25,000 signatures for government consideration in February 2026.
Business associations including the Union of Ukrainian Entrepreneurs and the Association of Employers called for a higher registration threshold of Hr.6 million ($136,360), and warned that the requirement to maintain a permanent accountant would add costs many small businesses cannot absorb. Think tanks cautioned that the projected fiscal gain of Hr.40.1 billion ($911.4 million) would fall short of the estimated administrative costs of implementing the changes, put at between Hr.61 billion and Hr.115 billion ($1.39 billion to $2.61 billion).
Danylo Hetmanstev, leader of the Servant of the People party and chairman of the Committee on Financial, Tax and Customs Policy, also voiced opposition.
“I personally promised FOPs that we would not change the single tax until the end of martial law. I intend to keep that promise,” he stated on Telegram.
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