How to avoid high taxes when building a cottage town in Ukraine
here will be some practical advice on the taxation strategy for cottage construction
There will be a lot of important information and practical links below. If it will be difficult to understand all the tax nuances of building a cottage town on your own, don’t waste your time. Delegate it to a specialist. An experienced accountant will help you choose the optimal taxation system for your project, and if necessary, will organize full accounting support for the construction.
Previously, cottage towns were built by an individual developer, without registering their business activities and paying fairly low taxes.
But now, under current tax legislation, if an individual sells houses that they have owned for less than 3 years (because it is obvious that immediately after construction is completed, the object will be sold, not kept), then taxation will be incredibly high: 10% on the first object and 23% on the second and subsequent objects per year. And this is without the costs of notarizing the transaction and without the buyer’s costs (PFU 1%).
Therefore, when organizing the construction of cottages, it is necessary to think over a tax optimization scheme. There is no single correct scheme that will suit any developer. Because the choice of a construction taxation scheme will depend on many factors: who owns the land for construction, what are the volumes of the project, what is the ultimate goal for the income received (sometimes all the income needs to be paid to an individual, and sometimes part of the income needs to be invested in the project). The idea of the article is to analyze options for optimizing the tax burden. It is important that every developer consults with professional tax consultants to ensure compliance with the law and avoid violations. If you want to comment on the article or add something, at the bottom of the article there will be a link to our video on this topic, you can leave a comment under the video.
What options for tax optimization exist in the field of cottage construction?
I will tell you about 4 options so that you can navigate different situations.
Option 1 – Sale of empty land
This option is often used, but it is not really a way to optimize taxation. It is a way to hide the real deal of selling a house.
It looks like this: an individual owns a plot of land on which a private house is being built. At the final stage of construction, a land purchase and sale agreement is signed with the buyer (in this case, an empty plot is sold, without any objects). Of course, under this agreement, the buyer pays only the cost of the land plot (which is usually low). The buyer pays the bulk of the funds without a contract (and therefore, without taxation).
When the buyer becomes the owner of the land, documents are submitted on his behalf to begin construction work, and the new owner supposedly quickly builds the facility and immediately registers the ownership in his name.
Tax burden when selling land: from 0% to 23% depending on the number of sales per year, the period of ownership of the plots and the availability of documented costs for the purchase of the plot.
Tax burden when selling a house: none. After all, there is no sale of a house.
Pros and cons of this scheme
- officially, only a transaction for the purchase and sale of “empty” land is made, so taxes are paid on a fairly small amount. A simple example: a plot for construction near Kiev – 450 thousand UAH., the same plot with a finished house – from 3 million UAH. Even if we take the highest tax rate of 23% for the calculation, then taxes for the sale of “empty” land will be 103,500 UAH., and taxes for the sale of land with a finished house – 690,000 UAH.
- this is a direct violation of the law
- Buyers, of course, do not want to agree to this option, because legally they are only buying a land plot (and in fact, they are also paying for a finished house, which does not yet exist on paper).
Conclusions: this is not a way to legally optimize taxes, it is a risky and reputationally disadvantageous scheme, especially if you are building a large business.
Option 2 – Creation of an LLC under the simplified taxation system and sale of a finished cottage from the LLC
In this case, the developer will be an LLC. In practice, almost always the land plots on which it is planned to build a private house belong to individuals. These individuals can cooperate, create an LLC and contribute land plots to the authorized capital. The LLC then builds cottages and sells the finished objects to end buyers under a regular real estate purchase and sale agreement.
Tax burden for LLC activities: 5% of LLC income (Single Tax, third group, excluding VAT) + 1% military levy.
Tax burden when withdrawing funds from an LLC:
- or 9% when paying dividends + 5% military duty (clause 167.5.4. PKU)
- or 0% upon the full withdrawal of the founder from the LLC, if the value of the real estate when it is contributed to the authorized capital of the LLC is equal to the value of the share when the participant leaves the LLC. That is, if the land plots belong to different individuals, they can be contributed to the authorized capital of the LLC, and after the implementation of each project, the individual founder who contributed the relevant land can leave the LLC, taking his share in the form of money. If the value of the land when contributed to the LLC (by the way, it is determined at the discretion of the founder, the expert assessment is not mandatory) and the value of the share when leaving the LLC are the same, then there will be no taxation at all, because the individual simply takes the same amount that he previously contributed to the LLC, he has no income;
- or payment for services to individual entrepreneurs (groups 2, 3) who provided these services to the LLC.
*When paying funds to individual entrepreneurs, the funds received by individual entrepreneurs are income for which taxes must also be paid:
Individual entrepreneurs of group II:
- Single tax: 1600 UAH.
- Military duty: 800 UAH (10% of the minimum wage – 8000 UAH).
- Minimum social security: 1760 UAH (22% of the minimum wage).
Individual entrepreneur of group III:
- Single tax: 3% with VAT, 5% without VAT
- Military duty: 1% of income
- Minimum single wage: 1760 UAH (22% of the minimum wage)
**But it is worth knowing that the tax authorities understand this “scheme” very well. They regard it as tax evasion or as an employment relationship. If you abuse it, you can get additional taxes and fines.
Pros and cons of this scheme
- LLC members are liable within the limits of their contributions (and NOT with all their property);
- the value of property when contributed to the authorized capital of the LLC can be determined at the discretion of the founder (without expert appraisal);
- the LLC can sell real estate at book value (which often differs significantly from the market value).
❗️The main mistake made in this scheme: you should not sell property below the book value, as this will be considered an additional benefit for the individual buyer (in which case the LLC-seller should have calculated and withheld 18% personal income tax + 5% military duty from the buyer). An example of such a court decision is Supreme Court Resolution of 02.05.2024 in case No. 320/3024/22.
- the total income of an LLC in the third group during the year must not exceed 1167 thousand monthly wages, which is 9,336,000 UAH UAH for 2025 (Subparagraph 3 of paragraph 291.4 of the Code of Civil Procedure);
❗️If the LLC’s income received during the year exceeds this amount, then on the amount of the excess you will need to pay a single tax in double amount (i.e. 6% if you had a rate of 3% with VAT, or 10% if you had a rate of 5% without VAT (clause 1 of clause 293.5 of the Tax Code of Ukraine). The military duty rate of 1% will remain (both for the amount up to the “exceeding the limit” and for the amount with the “exceeding”). You will also need to switch from the simplified system to the general one, that is, become a payer of income tax on a general basis by submitting an application no later than the 20th of the month following the calendar quarter in which the income was exceeded. In addition, in the event of exceeding the limit on the income received from the sale, VAT of 20% of the value of the property sold is charged.
- a fairly high tax burden rate if funds from the LLC need to be withdrawn as dividends in favor of the founders.
If you have any questions or would like to discuss your situation, please contact our tax attorney or chief accountant for advice.
Option 3 – Involvement of CIF
CIF is a corporate investment fund. To put it very simply, it is a joint-stock company that is created to attract investments. That is, the CIF itself is not a developer, the CIF is a company that helps the developer attract investments in his construction project. Why does the developer need another company? The fact is that the CIF’s funds are exempt from paying income tax.
Accordingly, when buying real estate, buyers sign a contract with the CIF (and pay part of the funds under this contract), and also sign a contract with the developer (under which they pay the other part of the funds). Thus, the developer reduces the share of funds that come to him as income. And the funds that “settle” in the CIF can then be received by the developer as dividends.
There are three options on the market:
- the developer creates his own CIF – it is long, expensive and operationally difficult. Therefore, this option is used only by very large players in the construction market. For example – the minimum authorized capital should be 10,000,000 UAH (as of 2025);
- the developer buys a ready-made CIF – this does not change the essence, it just happens faster than creating his own CIF;
- temporarily renting a third-party CIF – that is, the developer can use the services of a CIF that he does not own. Of course, the cost and conditions for attracting a CIF will depend on the specific organization that the developer chooses (prices on the market are very different).
Tax burden on the activities of a developer LLC:
- if we consider an LLC on a simplified taxation system – military duty 1%, as well as a single tax (3% if with VAT or 5% if without VAT)
- if we consider an LLC on a general taxation system – income tax 18% + VAT 20% (you will have to register as a VAT payer when the volume of sales transactions reaches 1 million UAH for the last 12 months), it may be interesting only if most of the LLC’s income will go to the official payment of construction costs with VAT.
Tax burden when withdrawing funds from an LLC to an individual founder, as well as from a CIF to an LLC: 9% when paying dividends + 5% military tax (or refinancing to the following objects)
Pros and cons of this scheme
- A well-known and widespread scheme, followed by a significant number of large developers, which allows most of the funds to be accumulated in the CIF, thereby exempting these funds from paying income tax.
Case law is reported quarterly. The final reporting deadline is 40 days after the end of the quarter.
- the complexity of organizing this scheme;
- quite high costs for renting a CIF and very high costs for creating your own CIF;
- if there is a need to withdraw funds as dividends, then first the CIF pays dividends to the LLC, and only after that the LLC will be able to pay dividends to the founder, an individual.
- case law.
Option 4 – Creating a concrete block
Housing and construction cooperatives still exist today. And in some situations, they are ideal for building cottage towns.
Why?
Tax burden on activity: 0%
Tax burden when withdrawing funds from the cooperative: 0%
But working with a cooperative can have very bad consequences if it is not organized correctly.
The minimum number of participants to create a cooperative is 3 people (they can be both individuals and legal entities). When creating a cooperative, participants in the cooperative can contribute their land plots to the cooperative as an entry fee (of course, these contributions are not taxable, p. 165.1.44 of the Civil Code of Ukraine). At the same time, they estimate the value of their contributions at their own discretion. Then, the housing and communal service, attracting contractors, builds cottages, and attracting new participants, receives financing (and again, the contributions of new members are not taxable). After the cottage is sold, the participant who contributed the land plot to the housing and communal service can leave the housing and communal service and take his share in cash in return. If this participant valued his land at a nominal UAH 2 million when contributing to the Housing and Community Fund (nothing prevents him from doing so), and when leaving the Housing and Community Fund he took back his UAH 2 million (which came to the Housing and Community Fund from the sale of the cottage), then no income arose, and therefore no taxation either.
❗️Two main risks of the concrete slab scheme
1. VAT issues when transferring land plots
The current legislation of Ukraine does not provide for the obligation of a cooperative to register as a VAT payer. Transactions involving the payment of entry fees and shares by individuals are not subject to VAT (pp.196.1.1 TCU). However, sometimes tax authorities interpret tax legislation in a special way and come to a different conclusion. There are two individual tax consultations on this issue, which have opposing conclusions from tax authorities. Therefore, before creating a housing cooperative, if it is planned to contribute land plots, it is better to seek your own individual tax consultation.
2. VAT issues when supplying housing
The transaction of transferring housing to a cooperative member is also exempt from VAT, since this transaction is NOT the first supply of housing (paragraph 197.1.14. TCU). The first supply is the supply of services from the contractor for the construction of the relevant facility in favor of the Housing Construction Company (IPK dated 02.09.2024, as well as the court decision in the case №813/7150/14). In this regard, it is possible for the Housing Construction Company to carry out its activities without paying VAT and without registering as a VAT payer. But for this it is necessary to officially formalize the legal relationship of the cooperative with the contracting organization that will carry out the construction work, and to confirm all operations related to the involvement of the contractor with the necessary documents.
Pros and cons of this scheme
- possibility of 0% taxation;
- a clear scheme that has been operating for a long time, and therefore has established practice;
- no need to involve third-party organizations (as in the case of the CIF).
- buyers first sign documents on joining the cooperative, contribute funds as a share. Then they sign an exchange agreement, according to which the share is exchanged for a finished house and land. This can be difficult for the buyer to understand;
- a team of accountants is needed that can properly support the activities of the cooperative;
- some accountants believe that theoretically there is a possibility of additional tax assessment for buyers (although so far such practice has not been observed from the tax authorities and these risks are theoretical).
If you have any questions or would like to discuss your situation, please contact our tax attorney or chief accountant to discuss your specific situation. If you have any comments or interesting suggestions on the topic, I suggest discussing them under the video.
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