For Ukrainian small and medium-sized businesses, it is no longer news that they have to grow — and sometimes simply survive — under wartime conditions, with shortages of both staff and resources. So owners and managers look not only for ways to earn, but also for ways to optimise costs, taxes among them.
This article looks at a common approach: building sole proprietors (FOPs) into the architecture of a business model in order to reduce the overall tax burden. We regularly hear the same question from clients — does our model show signs of what is called “business splitting”? That is why we decided to offer a simple tool for an initial self-check. But even a minimal risk score from a self-check does not mean the tax authority will assess the situation the same way.
When the question of business splitting arises
The question of artificial business splitting can arise during a scheduled or unscheduled documentary audit, or following a separate request from a supervisory authority. Scheduled audits are carried out according to a published schedule, with prior notice to the taxpayer; unscheduled audits only on the grounds set out in the Tax Code of Ukraine, including where a taxpayer fails to respond to a lawful request. However, special restrictions on unscheduled audits apply during martial law, so each case should be assessed individually. Temporary martial-law restrictions: Law No. 3219-IX and Articles 77–78 of the Tax Code of Ukraine.
If an audit has already taken place and you disagree with its findings, the procedure is a separate topic — we cover it in objection to a tax audit report.
Several sole proprietors are not a violation in themselves
Let us start with the main point: having several sole proprietors within a business structure is not, in itself, a violation. The risk arises when formally independent entrepreneurs in fact operate as a single business — sharing:
- management;
- access to resources;
- staff;
- clients.
And where the split exists mainly to reduce the tax burden or to stay within the simplified tax system.
What the tax authority looks at
It is important not to hunt for a single “fatal” indicator. On its own, an isolated fact proves nothing. The tax authority normally looks at the whole picture: whether each entity has genuine commercial independence, rather than merely its own contract or its own activity code.
Here is the material for self-reflection:
- Key decisions are in practice taken by one person, even though there are formally several business units.
- The sole proprietors share one office, warehouse, equipment, staff or retail outlet, with no clear division of roles.
- They operate under one brand, through one website, shared sales channels or a single client base.
- They have the same counterparties and interlinked cash flows that are hard to explain by any real division of functions.
- The sole proprietors or LLCs are registered at the same address, or are connected by family or corporate ties.
- They leave shared electronic traces — for example, using the same IP addresses for online banking or software-based cash registers.
- One sole proprietor replaces another once the income threshold is approached, while the operating model remains essentially unchanged.
- On the website or on social media the business presents people as its team, while legally they are sole proprietors on the simplified system. There is an additional risk where such sole proprietors sell goods or services to, or buy them from, companies related to them while in fact working at those same companies.
Why this matters to the owner
For an owner, what matters is not the mere fact of having several sole proprietors. The problem begins if a supervisory authority establishes that several entities were in fact operating as a single business. Additional tax assessments and financial penalties then become possible; the actual scale of the consequences depends on the operating model, the documentation and the findings of the audit.
It is not only the contracts on paper that are assessed. For tax purposes, the genuine economic substance of transactions matters too. The Tax Code links business purpose to the intention of obtaining an economic effect from commercial activity — put simply, a business model needs a logic that does not come down to tax savings alone.
This is also where the quality of day-to-day record-keeping shows: primary documents that reflect what actually happened are far easier to defend than a set assembled after the fact. Our accounting services in Ukraine are built around exactly that.
Questions for a self-check
- Does each sole proprietor have a genuine function, clients, resources, people, management decisions and a comprehensible economic rationale?
- Do the contracts, payments and primary accounting documents involving the sole proprietors match the way the business actually works day to day?
- Does the shared infrastructure (LLC plus sole proprietors) create the impression of a single business without a clearly explained division of roles?
- Can you explain, with documentation, why the activity is organised through several entities, other than to save on taxes?
- Would it be worth carrying out an independent tax and legal review of the structure before an audit or a dispute — while decisions can still be taken calmly rather than under fire?
How UHY Prostir can help
UHY Prostir can carry out a diagnostic review of your structure, examine the risk indicators and provide an opinion on which you can then base your decisions. Get in touch to discuss the scope.
This material is for information purposes only and does not replace individual advice.
FAQ
More questions on tax audits and tax risk management are collected in our FAQ.
Is a shared registered address proof of business splitting?
No. A shared address is only one of the facts that may be assessed alongside management, resources, clients and the real division of functions.
Does a single website or brand create a tax risk?
Not in itself. But a shared brand, website and sales channels can become part of the overall picture if they are used by several formally independent entities.
Can several sole proprietors work with the same counterparties?
They can, provided each performs its own commercially justified function and the contracts, payments and documents confirm this.
Are family ties between sole proprietors a violation?
No. But they may attract additional attention where they come together with shared management, resources or financial flows.
What should a business do if it receives a request from the State Tax Service?
Do not respond with a template. First check whether the request is lawful, then gather the documents and explanations that reflect the real operating model.
Is having one or more sole proprietors within a business structure unlawful?
No. The risk depends not on the number of sole proprietors but on the actual circumstances: the independence of each entity and the economic logic of the model.
Are different activity codes or separate contracts enough to remove the risk?
No. A formal set of documents is not the only thing that matters. The tax authority may analyse how management, resources, staff, brand, clients and financial flows are actually organised.
When is business restructuring needed?
When the structure has developed historically but operationally the business already works as one. Such a decision should only be taken after an individual analysis of the tax, legal and financial consequences.
Author: Hanna Matseva
