Today, a new stage of tax reality begins in Ukraine — the law on a record tax increase, which has already become a hot topic for discussion in society, came into force. On the one hand, this is an inevitable measure in the context of war, when the country needs every hryvnia for defense and reconstruction. On the other hand, in the conditions of a deep economic decline, when entrepreneurs are teetering on the edge of survival, and Ukrainians make ends meet every day, such a step is perceived as an additional blow to an already exhausted nation.
The Ukrainian tax system has always been a subject of controversy, the embodiment of complexity and inefficiency. But now, with the introduction of new rules, the country faces a fundamental question: can the economy and Ukrainians withstand these new challenges? Will the new law become a lifeline for the state budget, or on the contrary, another burden that will stop the country’s forward movement?
What the new tax law provides
On November 29, 2024, Law No. 4015-IX “On Amendments to the Tax Code of Ukraine regarding the peculiarities of taxation during martial law” entered into force. This document, which has already become the subject of heated discussions in society, introduces revolutionary changes to the taxation system. Its supporters say it is a necessary step to fill the budget of a country at war. Critics believe that the additional tax burden can become overwhelming for businesses and citizens who are already on the verge of financial survival.
The main innovation of the law is an increase in the rate of military duty from 1.5% to 5%, it will apply to the interest income of individuals on deposits. At the same time, it remains at the level of 1.5% for military personnel. It should be noted that the rate of 1.5% is applied to income accrued before the entry into force of the new law. That is, for example, the current military levy still applies to the advance in the first half of October. This applies not only to wages, but also to other income of individuals, including interest income from deposits. Such innovations cause concern among entrepreneurs, because even a minimal increase can become critical in the current economic conditions. Employers already struggling to make ends meet will be forced to pay an additional 3.5% in taxes on their workers’ wages. If earlier 195 hryvnias were deducted from every thousand from the official salary, now it will be 230 hryvnias. And this is just one of the many changes that will affect not only large companies, but also every Ukrainian, including the smallest entrepreneurs.
Special innovations concern individual entrepreneurs. They will feel these innovations as a blow to their already depleted incomes. For the first, second and fourth groups, a mandatory military levy in the amount of 10% of the minimum wage is introduced. Currently, the minimum salary is 8,000 hryvnias, therefore, entrepreneurs of these categories have to pay an additional 800 hryvnias every month. For FOPs of the third group on the simplified taxation system, a military levy in the amount of 1% of income is established. Previously, they paid 5% of income, but now the additional percentage means that, for example, they will pay 60 hryvnias instead of 50 from every thousand hryvnias of income.
And that’s not all. The law also introduces mandatory monthly reporting for all tax agents starting in 2025. Non-profit organizations, which are already beginning to feel new obligations, will now be forced to submit reports on the payment of the military levy at the end of 2024. However, one of the most discussed regulations on the collection of taxes “retroactively” was excluded. On the eve of the adoption of the law, the parliamentary committee removed the norm of raising taxation for private sector enterprises “retroactively” from October 1 and moved it to January 1, 2025. Minister of Finance Serhii Marchenko assured that there will be no retroactive taxation, although at the initial stages exactly such an idea was actively discussed.
In addition, according to the new law, from January 1, 2025, monthly reporting on the single social contribution (EUS), personal income tax (PIT) and military duty will be introduced for all tax agents in Ukraine. This is a significant change from the current practice of submitting such reports on a quarterly basis. The innovation is aimed at strengthening control over the payment of taxes and ensuring timely replenishment of the state budget, which is critically important during martial law.
At the same time, preferential conditions for certain categories of citizens continue. In particular, those who receive charitable assistance, including from abroad, are exempted from the obligation to submit a tax declaration on assets and income. This rule remains valid for internally displaced persons and Ukrainian refugees who receive payments abroad, allowing them to avoid the additional tax burden.
New reporting requirements are also being introduced for individual entrepreneurs. For the first time, they will have to submit reports on the payment of the military levy based on the results of 2024. The new reporting obligation covers the period starting from October 1, 2024. This means that entrepreneurs will have to adapt to the new rules, which will likely require additional time and resources to maintain financial records.
The corporate sector was also not left out. Income tax for non-bank financial institutions is increased from 18% to 25%. Gas stations are now forced to pay advance payments, the size of which depends on the range of products. For example, gas stations that sell several types of fuel will pay from 30,000 to 80,000 hryvnias, depending on the assortment and availability of alcohol and tobacco products for sale. In addition, fixed advance payments are imposed on currency exchange offices, the amount of which depends on the settlement and ranges from 200 to 700 euros in hryvnia equivalent. At the same time, it should be noted that the unpaid amount of the income tax advance is subject to a fine.
The changes did not escape the agrarians either. The minimum tax liability for agricultural producers has increased to 700 hryvnias per hectare, and for land with more than 50% arable land to 1,400 hryvnias. At the same time, the rent for the extraction of minerals such as sand, crushed stone and kaolin is increasing. Banks will now have to pay a 50% tax on profits from 2024 onwards.
The increase in rates will also affect other areas. Yes, mining rents for minerals such as crushed stone, sand and kaolin are increasing. Banks are obliged to pay 50% of the income tax based on the results of 2024. The minimum tax liability for agricultural producers is increasing: now it will be at least 700 hryvnias per hectare, and for plots with more than 50% arable land – 1,400 hryvnias per hectare.
It is expected that this law will allow the state to receive an additional 8 billion hryvnias by the end of 2024 and more than 130 billion in 2025. But at what cost? Will the economy survive, where businesses are barely afloat and Ukrainians struggle every day for financial survival? This question remains open.
Shadow economy: Ukrainian realities of tax evasion
The updated Memorandum with the IMF and the National Revenue Strategy until 2030 clearly fix the fiscal approach: the answer to new budgetary challenges is to raise taxes. Therefore, this principle has already been implemented in Law No. 4015-IX. However, high taxes are not only a burden, they are sometimes a sentence for a business. This especially applies to small and medium-sized enterprises, which are forced to look for ways to survive due to the tax press. For the first 10 months of 2024, the state budget has already received 916.2 billion hryvnias — 29.4% more than last year. But does the policy of direct increase in tax pressure justify itself? When the tax burden becomes unbearable, the business either closes down or plunges into the shadow economy.
As the government tightens fiscal controls and introduces new taxes, businesses and citizens, finding themselves under incredible financial pressure, are forced to look for ways to survive. In a country where the tax system often seems more punitive than incentivizing, tax avoidance becomes not only a way to minimize costs, but also a natural response to systemic flaws. Various schemes to reduce tax liabilities have long become an integral part of economic reality, reflecting not only the tricks of entrepreneurs, but also the weaknesses of state control. That is why there are all prerequisites to believe that with the adoption of the new law this phenomenon will only intensify.
One of the most common practices is violation of customs rules and smuggling. Manipulations with the customs value of goods, which allow underpayments, have already become a classic of Ukrainian customs. The “postal” scheme, when large volumes of goods are divided into small batches, and the “transit” scheme, which simulates the movement of goods across the territory of the country without their sale, allow you to evade significant amounts. No less popular is the so-called “ant” method, by which goods are transported in small quantities by numerous couriers, avoiding official registration at the border.
Another significant source of losses for the budget is the abuse of value added tax. “Scroll” schemes allow you to receive a tax credit for non-existent transactions. For example, in the field of agriculture, especially in relation to grain, illegal processing has gained a huge scale. These practices not only destroy trust in the tax system, but also create an unequal playing field for bona fide market participants.
In addition, large companies have long mastered another way of evasion — shifting profits to tax havens. Using international agreements and the practice of treaty shopping, they minimize their liabilities, creating the impression that the income is received in low-tax jurisdictions. This method often remains beyond the reach of regulatory authorities due to the difficulty of proving violations.
The shadow real estate and rental market is also a huge black hole for the budget. Landlords, avoiding registration of transactions, receive income that remains invisible to tax authorities. The situation is similar with the counterfeit market of excise goods: the illegal production and sale of alcohol, tobacco and fuel not only harms legal business, but also significantly reduces state revenues.
The long-standing practice of paying salaries “in envelopes” has become another sore point of the tax system. A business that seeks to avoid paying taxes and a single social contribution pays employees unofficial salaries, which significantly reduces the level of pension and social guarantees. While the government is trying to introduce new tax regimes, entrepreneurs are using loopholes, such as structuring businesses through pseudo-FOPs. Such schemes are not unique to Ukraine, but the scale of their use increases precisely during the war, when the tax burden becomes critical.
Shadow economy in numbers
The Ukrainian economy has long been living in a regime of parallel reality: one part is the official sector, which heroically carries the tax burden, and the other is a deep shadow, where billions are spinning, bypassing the budget. Every hryvnia that does not reach the state treasury is a hole in the financing of the army, infrastructure or medicine. But the scale of these schemes amazes even the most skeptical. Their combined turnover reaches 1.3 trillion hryvnias per year, or 17.4% of the country’s official GDP. That is, almost a fifth of the economy functions outside the law.
How it looks in numbers. At the top of the hit parade of tax schemes are smuggling and salaries in envelopes. The first category, which covers fraud with customs value, “transit” schemes and “ant” borders, costs the state from 120 to 167 billion hryvnias every year. Salaries in envelopes, which remain a favorite game of small and medium-sized businesses, take another 115 to 230 billion hryvnias from the budget. Together, these two categories account for two-thirds of losses from tax schemes. During the war, they strengthened their positions even more, because currency restrictions and the difficulty of withdrawing capital abroad made domestic machinations more attractive.
Another antagonist of the budget is the “renaissance” of transit and conversion centers, which in 2024 will reach 200-250 billion hryvnias per year. Schemes using “drops” and “mules” allow money to circulate without any “white” income, bringing it into shadow circulation. And while the bank accounts of Ukrainians are subject to massive checks, these centers are thriving, remaining almost invulnerable to regulatory authorities.
Value-added tax, or more precisely VAT “rolls”, is another pain point. The National Tax Service reports some progress in combating the schemes, but the fact remains: VAT, which should be a key budget filler, remains a hole. Imperfect administration and abuse of the tax credit mechanism create a constant flow of lost billions. The shadow market of excise goods is not far behind. Alcohol, tobacco and fuel, which have always been the leaders of the illegal economy, continue to drain the budget. The state is trying to regain control: rising excise taxes and anti-counterfeiting campaigns have already produced results — for example, reducing the shadow segment of the fuel market to 13% in 2023. However, as the experience of the EU shows, a too rapid increase in excise duty rates without effective control only increases the scale of the shadow market.
Offshores, once champions of evasion schemes, are losing popularity. The war, currency restrictions and international tax transparency standards (BEPS, FATCA and others) made them less accessible to mass business. Now it is the prerogative of large companies and wealthy Ukrainians. But even in this format, offshores remain a symbol of systemic loss of confidence in tax policy.
Total budget losses from the most common schemes reach 340–530 billion hryvnias per year. These are sums that could be part of a solution to finance defense or economic recovery. If this money were to enter the budget, the need for permanent tax increases planned for 2025-2027 could disappear. However, this requires not only political will, but also a radical revision of the entire control system, digitalization of tax processes to a transparent tax policy. However, this requires a systemic approach: from now on, state policy is mostly focused on increasing pressure, without eliminating the root causes of shadowing.
The shadow economy in Ukraine is not just a reaction to tax pressure, but a systemic phenomenon that threatens the financial stability of the state. The government is trying to patch the holes by tightening controls, but this only increases the number of evasion schemes. Tax evasion has become evidence that the system needs not so much punitive measures as reforms that would ensure a level playing field, fair taxation and transparency. Until this happens, the struggle between the state and the shadow economy will continue, and business will look for new ways to bypass the system that is suffocating it.
Introducing a new wartime tax law is a knife-edge balancing act between the need to fill the budget and the risk of wiping out businesses that are already struggling to survive. The government expects to receive billions to help hold the front and finance the country’s critical needs, but at what cost? In an environment where entrepreneurs are faced with scarce resources, staff losses and lack of stability, the additional tax burden can be the final blow that forces the business to either go into the shadows or close its doors for good.
Raising taxes without real reforms threatens not only economic growth, but also public trust in public policy. Instead of stimulating business development, the government pushes entrepreneurs to find new loopholes and evasion schemes. In such conditions, the shadow economy will not only survive, but will also receive an additional push to flourish. People will work in “envelopes”, and large companies will find new ways to optimize through offshore or transit schemes.
The state budget does need additional revenues, but if these funds are obtained by stifling business and increasing social tension, it can turn into long-term losses. An economy devoid of dynamism and investment risks turning into a closed circle of survival rather than development. The new tax law could be a chance for reform and detinization, but in the current environment it risks becoming another page in the story of lost opportunities.
Oksana Ishchenko
