Business Splitting of Sole Proprietors and Tax Abuse: Draft Law 2026

The author of the article: Denis Korablyov

Modified date: 11 March 2026

Is your business divided among several sole proprietors? In such a situation, the tax authority may consider the structure as business splitting. Do you have several sole proprietors in the family? It may seem like a convenient and profitable option. But the Ministry of Finance is preparing a draft law that closes schemes entrepreneurs have used for years.

In this article we will explain in detail: what business splitting is and how it differs from a legal division, what the tax abuse draft law proposes, what signs of tax evasion the tax service looks for, and what should already be done now.

What is “business splitting”

Business splitting – is the artificial division of a single enterprise into several separate entities, most often sole proprietors, in order to reduce the tax burden. Formally these are different taxpayers. In reality – one business. 

Why does business do this? The main goal – to keep the benefits of the simplified tax system: a fixed single tax, no VAT obligations, and simpler reporting. In other words, each of these five entrepreneurs stays within the single tax limit. If this business operated as one legal entity under the general tax system – it would pay 18% corporate income tax and register as a VAT payer. Splitting allows avoiding this.

Why has this become a problem? According to the Ministry of Finance, such schemes significantly reduce budget revenues and create unequal competition conditions – honest businesses operating under the general system pay much more. That is why the state has begun developing a separate counteraction mechanism – and the draft law is already on the table.

Current regulations and changes in the tax abuse draft law

“Business splitting” – is not a legal term. There is no such concept in any article of the Tax Code or the Criminal Code. It is a common expression actively used by the tax service and members of parliament – but not by the law.

However, the absence of a separate article does not mean the absence of liability. Tax authorities and law enforcement already classify splitting through existing norms – Article 212 of the Criminal Code of Ukraine (tax evasion). This means inspections take place and criminal cases are opened – simply not under a separate “business splitting article”, but under general tax evasion provisions. 

When does Article 212 of the Criminal Code apply? It applies when the amount of unpaid taxes reaches 4 million 542 thousand UAH. Many entrepreneurs consider this amount enormous and “definitely not about them”. But in reality it is enough to have just 4-5 sole proprietors in group 2 to approach this limit.

But there is good news: there is a certain protective mechanism. Article 212 of the Criminal Code provides exemption from criminal liability if the entrepreneur voluntarily pays the additionally assessed taxes and compensates the damages before official prosecution.

Therefore, even without a new law businesses already face real risks: documentary inspections, additional tax assessments, fines and penalties – and potentially criminal proceedings.

The Ministry of Finance is already developing a draft law directly related to business splitting. For now it is only a draft – but the direction is clear: the state is preparing to close schemes that previously existed in a “grey zone”.

New provisions of the draft law:

1. The concept of “tax abuse”. The Tax Code plans to introduce a new concept. Abuse will include transactions whose main purpose – is to reduce taxes rather than conduct real business activity. If the tax service decides that a transaction falls under this definition – tax benefits will be canceled and taxes recalculated under general rules. Simply put, tax authorities will no longer limit themselves to a formal check – whether the payment went through or the tax was paid. They will have the right to subjectively evaluate the substance of the transaction and its real economic purpose. This is a fundamental change in approach. 

Art. 14.1.174 of the Tax Code “Tax abuse”

“A separate transaction (agreement, action), a combined transaction or a series of transactions (agreements, actions) that do not meet the criteria for recognizing a combined transaction, the main purpose or one of the main purposes of which, considering all relevant facts and circumstances, is obtaining a tax benefit by the taxpayer in the form of non-payment (partial payment) of taxes and/or exemption from paying taxes or taxation, reduction of tax liabilities…”

2. Extension of tax audit periods to 7 years. Currently the standard period – is 3 years. If signs of tax abuse are identified – the audit may cover 7 years. This means that transactions that seemed long closed may be reviewed retroactively.

3. Cancellation of benefits and higher tax rates. The draft law provides that if a transaction is recognized as tax abuse – the entrepreneur loses not only the advantages of the simplified system. The tax authority will be able to cancel any benefits the entrepreneur used and recalculate taxes at higher rates for the entire recognized period. In practice this means: if tax abuse is proven, the money saved for years under the single tax system may be additionally assessed in one decision – together with fines and penalties for the entire period.

4. Additional sanctions. If previously after the cancellation of the simplified system a taxpayer could return to it after 1 year, now this period will be doubled. Under the new rules this period will be 2 years.

5. For medium and large businesses – several additional changes. First, they plan to limit the amount of loan interest that can be included in expenses – no more than 30% of the company’s operating profit. Second, a tax on transferring assets abroad will appear – if a company transfers property or business to another country, it will be taxed. This rule does not apply to sole proprietors and individuals. These changes do not directly affect small businesses – but if you plan significant scaling, it is worth keeping this in mind.

* Current regulations are valid at the time of publication. Draft provisions may change.

How the tax authority will check business splitting

An audit begins long before an inspector appears at the door.

Banks

they are already subjects of financial monitoring and track suspicious patterns: large incoming transfers, circular transactions, regular transfers between related accounts. If something looks unusual – the bank asks questions: where the money came from, what activity it relates to, whether taxes were paid. And then transfers the information further – to the tax service.

Tax Service

analyzes the received data: who pays whom, from which accounts, how often and in what amounts. Inspectors decide on further actions. If an audit is opened – they request and examine documents: contracts and completion acts, HR documents, lease agreements, IP addresses and CRM system data, bank payments and statements.

Bureau of Economic Security

 joins at the next stage – when the tax authority or other bodies see signs of an economic offense. In this case a pre-trial investigation may begin, during which the origin of funds, the movement of money between accounts, and the reality of business transactions are checked

Simply put: what banks are already doing with large incoming transfers – tax authorities will soon be doing as well.

Example: 

A man owns an LLC that sells construction materials. His wife – an SMM specialist, a sole proprietor with activity code 73.11 “Advertising agencies”. Every month the LLC transfers money to her for “advertising services”. The wife’s only client – is her husband’s LLC.

The tax authority opens an audit and requests acts of completed work. But during the analysis it turns out: the LLC has no social media pages, no advertising on the website, and no evidence of advertising activity at all. The acts exist – but there is no real work behind them.

The tax authority’s conclusion is obvious: the wife’s sole proprietorship exists not to provide advertising services but to withdraw funds from the LLC into the simplified tax system and reduce the tax burden. This – is a classic sign of tax abuse.

Checklist: does your business show signs of splitting

The tax authority builds the full picture from details. And the more coincidences there are – the higher the risk. This is a checklist of signs of business splitting or “tax abuse” that the tax authority pays attention to first:

1. No economic sense – only tax benefit. If the only reason for dividing the business between several sole proprietors is to avoid the general tax system or the income limit, this is the main sign. The question is simple: is there a real commercial justification for such a structure – or just the desire to pay less tax?

2. Money passes through the same hands. Funds are collected in one account or controlled by one person and then distributed between sole proprietors. Circular transfers and frequent large transactions between related entrepreneurs are another red flag.

3. One staff for everyone. When the same employees serve several sole proprietors, and decisions, for example about pricing, purchases and logistics, are made by one person.

4. Shared technical infrastructure. The same IP addresses, shared logins to client-bank systems or software RRO, unified administrative accounts. Or simply – the absence of separate accounting records for each sole proprietor.

5. One brand, one client base. A single trademark or brand, identical advertising and signage, and the same counterparties transfer funds to accounts of different sole proprietors.

6. Turnover grows but the business does not. Sales increase, but staff and assets remain at the same level. A mismatch between turnover and real resources is a signal for inspection.

7. One premises or equipment for everyone. Several sole proprietors operate in the same office or use the same equipment – without documents confirming the distribution of expenses or usage rights.

None of these signs alone is a verdict. But if several coincidences appear at the same time – this already becomes grounds for a deeper inspection. Therefore compare your business with this checklist. 

When the structure of sole proprietors may attract the attention of the tax authority

The tax authority usually begins analyzing a business structure when several of the following signs appear at the same time:

• several sole proprietors receive payments from the same clients
• fund transfers regularly occur between sole proprietor accounts
• access to client-bank systems is made from the same IP addresses
• several entrepreneurs use one website, brand or advertising accounts
• accounting is managed by one person or one company

A single sign does not mean a violation. But if the tax authority sees several such coincidences at once – it may become a reason for additional analysis or inspection.

A real case of a business splitting audit

During one of the audits the tax authority analyzed a coffee shop chain registered under several sole proprietors. All entrepreneurs worked under one brand, used a shared warehouse and the same staff.

During the audit it was established:

• sales were conducted through one website
• funds were regularly redistributed between sole proprietor accounts
• accounting was handled by one person

The tax authority concluded that in reality this was one business, divided between several sole proprietors.

As a result:

• the simplified tax system was canceled
• taxes were recalculated for several years
• fines and penalties were additionally assessed

This case shows that for the tax authority not only the legal form of the business matters, but also its actual structure. If several sole proprietors operate as a single company – with a shared brand, staff and financial flows – the tax authority may recognize this as business splitting. In such a case

What business structure is considered legal?

Dividing a business between several sole proprietors – is not always business splitting. The law allows it. But there are clear conditions.

The structure is legal if each sole proprietor:

• conducts a separate type of activity
• has their own assets, accounts and clients
• independently signs contracts and maintains their own accounting

Regarding family sole proprietors, the situation is similar: the fact that a husband and wife both have sole proprietorships is not a violation by itself.

Consequences of detecting tax evasion

If the tax authority recognizes a business structure as splitting – the consequences apply simultaneously in several areas. 

Financial:

• additional tax assessments for the audited period + penalties + fines
• retroactive cancellation of all tax benefits (including those related to education or mortgage)
• retroactive cancellation of the simplified tax system + tax recalculation under general rules
• higher single tax rate during the transition period in the quarter of cancellation: currently 15%, under the draft – 30%

Administrative:

• inclusion in the registry of risky taxpayers
• blocking of tax invoices
• enhanced control and more frequent inspections

Criminal:

• if the amount of evasion is significant – criminal prosecution under Art. 212 of the Criminal Code

What should you do if there are signs of business splitting?

The law has not yet been adopted – but the risks already exist. Radically restructuring your business before the final text of the law appears – is unnecessary. First, compare your business with the checklist. Then it is worth taking preventive steps.

1. Conduct an internal audit. Check contracts, acts, invoices and payment flows. Look at your structure through the eyes of a tax inspector – are there obvious “red flags”?
2. Eliminate clear signs of splitting. To do this, separate the material base, divide clients and accounts between sole proprietors.
3. Document shared resources. If several sole proprietors use the same premises or equipment – this must be confirmed by real documents with a distribution of expenses and usage rights.
4. Ensure the economic justification of each sole proprietor. Each structural unit must have a real commercial justification.
5. Prepare evidence in case of a dispute. Documents confirming the independence of each sole proprietor are better prepared in advance than collected hastily during an audit.
6. Hire lawyers. An independent evaluation of your own structure has subjective limitations. A lawyer experienced in tax disputes will see risks that are not obvious from the inside.
7. Follow updates to the draft law. Stay informed as soon as the draft law comes into force, so follow official sources: the Ministry of Finance website, the Verkhovna Rada and the Tax Service portal. We will immediately publish updates and explanations in our blog on buh.ua.