Survival in the conditions of the Ukrainian market: why entrepreneurs are forced to work “in the gray”

Ukrainian business today is a field of constant survival, where every day brings new challenges and threats. Some entrepreneurs still continue to look for legal ways of development, but the majority have already understood: transparency in the conduct of business can be a ticket to the irreversible road to bankruptcy. Everyone knows very well that working “in white” in Ukraine is like running a marathon with a weight on your shoulders: exhausting, overwhelming, and often simply impossible to reach the finish line.

Taxes that eat up the lion’s share of profits, endless audits, corrupt appetites of public officials – these are just some of the problems that force businessmen to choose the dark side. But can you blame them for that? When the state only complicates the playing field, it becomes clear why many choose to work “in the dark”, hiding income and using shady schemes.

At the same time, the shadow economy does not just exist – it is thriving. Hundreds of companies across the country are forced to adapt to conditions dictated by high tax rates and unbearable bureaucracy. They use schemes with fictitious FOPs, pay salaries “in envelopes” and hide income to survive in this ruthless economic reality. But how long can it last? And what are the consequences of this endless game of hide and seek for the country?

Reasons for shadow business

High tax rates

The tax burden in Ukraine is one of the highest among European countries, which significantly complicates conducting legal business. As of 2024, Ukrainian entrepreneurs must pay a single tax, which amounts to, for example, UAH 302.80 (10% of the subsistence minimum) for the first group of self-employed persons; for the II group of FOP – UAH 1,420 (20% of the minimum wage). In addition, the maximum amount of annual income for taxpayers of the first – third group of single taxes is tied to the minimum wage, so the following limits will apply from January 1, 2024:

• for the 1st group (167 minimum wages) – UAH 1,185,700;
• for the II group (834 minimum wages) – UAH 5,921,400;
• for the III group (1167 minimum wages) – UAH 8,285,700.

If the maximum amount of annual income is exceeded, the entrepreneur switches to the application of another group of single tax or to the general taxation system from the next quarter. At the same time, according to clause 293.4 of the Code of Civil Procedure, a rate of 15% is applied to the amount of excess of the above-mentioned income.

Entrepreneurs also pay 20% of VAT and 22% of the single social contribution imposed on the wage fund. In addition, there is a military levy in the amount of 1.5% of employees’ salaries.

These tax rates create serious barriers for small and medium-sized businesses trying to operate legally. For example, companies working in the IT sector are trying to optimize costs by switching to work through sole proprietorships, where the tax burden can be reduced to 5%. This allows them to maintain profitability and avoid significant costs in taxes and contributions.

An example of this can be a small IT company in Kyiv, which, faced with high tax obligations, switched to a scheme of work through FOPs. This allowed it to reduce tax costs, avoid layoffs and maintain competitiveness in the market. However, such a scheme has risks associated with possible sanctions from tax authorities, which are increasingly paying attention to such practices.

In addition, high taxes significantly affect the EBITDA (earnings before interest, taxes, depreciation and amortization) of the enterprise, forcing them to operate “in the gray” (informally) to reduce the tax burden.

Consequently, high tax rates in Ukraine create an unbearable burden for entrepreneurs, forcing them to look for ways to minimize costs through shadow schemes, which in turn negatively affects the country’s economy.

Complexity of tax administration

Tax administration in Ukraine remains one of the most complicated and bureaucratic procedures among European countries. As of 2024, the average business in Ukraine spends about 240 hours a year filling out tax returns. This is much more than in the developed countries of Europe, where this indicator usually ranges from 150 to 180 hours.

The main reason for this situation is the complexity and number of different reports that entrepreneurs must submit to tax authorities. The Tax Code of Ukraine provides for various reporting requirements, including detailed calculations of income tax, value added tax (VAT), uniform social contribution, military service, and other mandatory payments. Often, these reports require submission not only in electronic, but also in paper format, which further complicates the process.

An example is a construction company in Lviv, which must submit several different types of reports to the tax authorities every month, including reports on VAT, income tax, and social insurance contributions. Due to the complexity and number of documents required, the company was forced to hire an additional accountant to handle this volume of work. This led to an increase in the costs of business administration, which, in turn, reduces its profitability.

This situation forces entrepreneurs to look for ways to optimize costs, often using shady schemes, which further complicates the situation in the economy.

High labor costs

One of the main problems for business in Ukraine is also the high cost of official employment. As of 2024, businesses must pay significant taxes and contributions, which significantly increases labor costs. In addition to personal income tax (PIT) in the amount of 18%, employers must deduct a single social contribution (SSI) in the amount of 22% from wages. A military levy of 1.5% is added to this.

This leads to the fact that the costs of formal employment increase significantly, and many entrepreneurs are forced to look for alternative ways to reduce costs. This often results in the practice of paying part of the salary “in envelopes”, which allows to reduce the amount of tax and social deductions. However, such a scheme deprives workers of social guarantees, including pension and medical benefits.

For example, a Kharkiv company engaged in the production of plastic products faced the need to reduce employment costs. In order to maintain competitiveness in the domestic market, the company decided to switch to partial payment of labor in cash, which allowed to reduce tax liabilities. However, this also means that the employees of this company are deprived of the social guarantees that are provided to officially employed workers. And there are such examples throughout Ukraine at thousands of enterprises.

Bypass mobilization

With the beginning of a full-scale war in Ukraine, the question of mobilization became critically important for many enterprises. Many employers try to protect their employees from the draft by resorting to informal employment. This practice allows employees to remain “off the radar” of TCCs and SPs, as their data do not appear in official registers used for mobilization needs.

According to studies carried out in 2024, this phenomenon has significantly increased in the construction sector, transport and other industries that require a large number of workers. An example can be a Kyiv company engaged in road construction. In this company, out of 30 workers, half were hired unofficially precisely in order to avoid their mobilization. This decision allowed employees to avoid military service, but at the same time created significant risks for the company itself in case of inspections by government authorities.

Such actions are a violation of the law, and if discovered, the company may face large fines and other sanctions. However, in the face of war and a growing labor shortage, many entrepreneurs are willing to take risks in order to keep their employees and ensure the smooth functioning of the business.

Corruption in state bodies

Corruption remains a serious problem for business in Ukraine, especially in conditions of war and economic instability. According to Transparency International, in 2024 Ukraine will rank 122 out of 180 countries in the corruption perception rating. This indicates a high level of corruption risks in all spheres of public life, including government bodies engaged in tax administration, licensing, certification and other regulatory functions.

Entrepreneurs often face demands for bribes from government officials, which puts additional pressure on legitimate businesses. For example, an enterprise producing agricultural machinery in the Poltava region repeatedly faced demands for bribes from local tax inspectors. To avoid problems with regulatory authorities, the company was forced to switch to a scheme using individual entrepreneurs (PPOs) and paying shadow wages. This allowed the company to avoid fines and maintain its activities, but at the same time made it dependent on corruption mechanisms.

Bureaucracy and lengthy procedures

Bureaucratic procedures and delays in obtaining permits, licenses and certifications remain one of the biggest obstacles to business development in Ukraine. The delay in the process of obtaining the necessary documents can last for months, and sometimes even years, which significantly complicates the launch of new projects or the expansion of an existing business.

For example, in 2024, one of the Kyiv companies engaged in the import of medical equipment waited for more than a year to obtain the necessary permits. During this time, the company could not carry out its core activities, which led to significant financial losses. Due to lengthy procedures and a high risk of corruption, the company was forced to use illegal means of importing equipment, which reduced its costs, but at the same time jeopardized the legality of its activities. In such conditions, many entrepreneurs choose shadow schemes to avoid lengthy bureaucratic procedures and maintain competitiveness.

Unauthorized checks and pressure from law enforcement officers

In addition to corruption and bureaucracy, Ukrainian business also faces constant unauthorized inspections by law enforcement agencies. These inspections are often carried out without prior notification and sanctions, and their purpose is not to protect the law, but to pressure businessmen in order to receive bribes or other benefits.

According to the reports of entrepreneurs, law enforcement officers often give businesses “nightmares” by conducting sudden searches and seizure of documents, without understanding the essence of the case. These actions can lead to a temporary shutdown of the enterprise, loss of important documentation and even the threat of bankruptcy. Such pressure from law enforcement forces many entrepreneurs to look for ways to protect their business, including informal agreements and shady schemes.

Consequently, corruption, bureaucracy and unauthorized inspections remain serious obstacles to business development in Ukraine in 2024. These problems contribute to the spread of the shadow economy and undermine trust in state institutions, which negatively affects the overall economic climate in the country.

Consequences of shading

Influence on the economic security of the state

Tinization of the economy also has a direct impact on the economic security of the state. In conditions where a significant part of the economy operates outside the boundaries of official regulation, the government does not have full control over economic processes. This makes it difficult to plan the state budget, conduct an effective fiscal policy, and ensure macroeconomic stability.

The shadow economy in Ukraine, according to estimates by the International Monetary Fund (IMF), will make up about 32% of GDP in 2024. This means that the state does not receive billions of hryvnias in the form of tax revenues that could be used to finance the Armed Forces, social programs, infrastructure projects, defense spending and other important initiatives. A decrease in tax revenues undermines the government’s ability to provide for the basic needs of the population, as well as to invest in the development of the economy.

This is especially critical in times of war, when the country needs stable and high revenues to maintain defense capabilities and ensure the safety of the population. The lack of tax revenues forces the state to turn to external creditors, which increases the state debt and makes the country dependent on international financial aid.

Impact on business competitiveness

Companies operating in the shadows have limited opportunities for growth and development. They cannot take full advantage of government support programs, loans and investments. For example, businesses that do not declare their income cannot apply for government grants or participate in tenders, which significantly limits their opportunities to expand their activities.

Moreover, the lack of access to formal financing forces such companies to rely on illegal or high-risk sources of financing, which increases their vulnerability to economic shocks. As a result, such businesses remain small and less competitive, which reduces their chances for long-term success and sustainable development.

Negative image of the country

The prevalence of shady schemes in business has a negative impact on Ukraine’s international image. Foreign investors, faced with corruption, opaque rules of the game and unstable legislation, often choose other countries for investment. This reduces Ukraine’s economic growth potential and limits the inflow of foreign capital that could be used to develop infrastructure, create jobs, and strengthen the economy.

Moreover, high dependence on shadow schemes undermines trust in Ukrainian institutions, which makes the country less attractive to international partners and investors. This creates risks for long-term economic development and increases the country’s dependence on external financial infusions.

Thus, Ukraine today faces economic problems, however, instead of supporting business in difficult times, the state creates additional barriers. High tax rates, endless bureaucratic obstacles, corruption and unauthorized inspections have become the norm for Ukrainian entrepreneurs. Instead of helping businesses survive in the face of war and economic instability, the state’s actions only increase the pressure on those trying to work legally.

Under such conditions, entrepreneurs are forced to choose between two evils: either succumbing to corrupt demands and using shady schemes, or risking their business and the well-being of their employees in an effort to comply with the law. Such a situation poses serious threats not only to economic stability, but also to the national security of the country. A business that is forced to work in conditions of constant fear of mobilization, checks and corruption cannot develop and provide jobs.

How can business, society and the economy in general survive in such conditions? The answer to this question lies in the need for urgent and radical reforms aimed not only at reducing the tax burden, but also at creating transparent, clear and fair rules of the game. Ukraine has long needed to get out of the vicious circle of bureaucracy and corruption in order to ensure a decent future for both business and society as a whole. Only then will Ukraine be able to transition to a model of sustainable development, where business will be a reliable, transparent partner in building a strong and stable economy.

Oksana Ishchenko