Business splitting: When tax structuring becomes a risk for business owners and companies

What is business splitting from a legal perspective?

Ukrainian legislation does not provide a separate legal definition of the term business splitting. However, in tax disputes, it generally refers to the artificial division of a single business into several business entities in order to obtain tax advantages that do not reflect the actual economic substance of the business.

From a legal perspective, the issue is not the existence of several sole proprietors (FOPs) within one business group, as there is no legal restriction on the number of business partners or counterparties. The key risk factor is the artificial nature of the structure, where one indivisible business operates under the guise of several legally independent entities.

Indicators of business splitting to avoid

• shared resources across the entire business structure, including offices, websites, employees, equipment, or other assets;
• identical or substantially similar business activities;
• control by the same individuals;
• bank accounts of all entities opened with the same bank;
• the same actual business address;
• shared contact details, including email addresses and telephone numbers;
• the same trademark or business signage used by all entities;
• the same HR specialist, SMM specialist, marketing manager, accountants, or legal advisers serving the entire business structure;
• engagement of employees as sole proprietors (FOPs) instead of under employment relationships.

The tax authority’s approach: What the STS looks at first

In practice, the tax authorities assess not only the documents but also how the business actually operates. The key question for the controlling authority is whether each business entity functions as an independent market participant or merely serves as part of a tax optimisation scheme. In other words, the authorities evaluate whether the overall set of circumstances demonstrates that each individual entity lacks independent economic substance.

Indicators most commonly identified by the State Tax Service during tax audits

• Shared business premises: the use of the same office, retail space, warehouses, or production facilities without genuine lease or sublease agreements.
• Centralised management and related parties: all key decisions are made by one individual or a group of related persons, while the other entities have no real managerial autonomy; directors, founders, or sole proprietors (FOPs) are relatives, managers of the same company, or the same individuals.
• Identical or closely related business activities: all entities carry out the same type of business activity, work with the same counterparties, and perform interchangeable functions.
• Shared infrastructure: the use of the same IP addresses for tax reporting and online banking, shared personnel (accountants, HR specialists, lawyers serving all entities), and the use of the same trademark without licensing agreements.
• Sequential registration of sole proprietors (FOPs): new sole proprietors are registered when the previous entity approaches the income threshold for its simplified taxation group.

Legal and financial consequences

Since there is no separate legal definition of business splitting, there are also no specific statutory provisions establishing direct penalties for such conduct. However, the tax authorities apply a risk-based approach and assess how a business actually operates in practice. Where violations are identified, additional taxes and penalties may be imposed under the general provisions of tax legislation.

The legal and financial consequences of business splitting may include:

• additional tax assessments, including the military levy (5%), personal income tax (15% or 18%), unified social contribution (22%), and value added tax (20%);
• financial penalties ranging from 10% to 50% of the assessed tax liability;
• cancellation of simplified taxation status;
• additional tax assessments and financial penalties where concealed employment relationships are identified;
• criminal liability in the form of fines for tax evasion and failure to pay mandatory taxes and charges.

How to avoid business splitting and build a compliant business structure

Ensure a genuine business purpose in contractual relationships

Any agreement between entities within a business structure should not exist merely on paper.

The substance of a transaction is more important than its title. Tax authorities will first examine transactions between related companies or sole proprietors (FOPs). Agreements should reflect genuine commercial purpose and economic substance.

As for pricing, transactions between related entities should not differ significantly from market prices.

A useful question to ask is: What commercial benefit does each party receive from this transaction? If the sole purpose of an agreement is to transfer funds to avoid exceeding the income threshold under the simplified tax regime, this is a clear risk indicator.

Maintain autonomy: Functions, resources, and economic role

Each entity within the structure, whether a limited liability company (LLC) or a sole proprietor (FOP), should operate as an independent business unit.

Each entity should have its own, or officially leased, assets, equipment, and licences where required.

Avoid duplicating business activities. For example, one LLC may handle imports, another logistics, while sole proprietors (FOPs) carry out retail sales to end consumers. Every entity should perform a distinct role within the value chain.

Keep accounts, records, and management separate

Mixing financial flows and business operations is one of the quickest ways for a structure to be regarded as artificial.

Each entity should maintain separate bank accounts and accounting records. No payments should be made without proper contractual grounds. Every entity must keep independent accounting and tax records.

Company directors and sole proprietors (FOPs) should make decisions independently. If all sole proprietors are effectively managed by the same accountant using a single qualified electronic signature (QES), the tax authorities are likely to regard this as evidence of centralised control.

Avoid duplication of infrastructure

The tax authorities can quickly identify the following indicators through automated systems:

• IP addresses: all entities submit tax reports or manage online banking from the same IP address;
• Personnel and cash registers: employees are systematically transferred between entities without changing their workplace, or the same sales staff operate different cash registers (RRO/PRRO) belonging to different entities;
• Warehouses and retail premises: multiple entities use the same premises without a clear allocation of space, for example, through valid sublease agreements.

Create an interaction framework for a group of companies

Where a group of related entities objectively exists, there is no need to conceal that relationship. Instead, it should be properly documented and legally structured.

It is advisable to develop and document an internal framework defining the roles, pricing principles, responsibilities, and risk allocation within the group.

The documentation should clearly specify the commercial functions of each group member, the allocation of operational risks, and the rationale behind the group’s internal pricing model.

Monitor income thresholds

Eligibility criteria for the simplified taxation system are not static.

Income thresholds under the Tax Code are linked to the minimum wage established as of 1 January of the relevant tax year.

Businesses should regularly, on a monthly or quarterly basis, review the income of each sole proprietor (FOP) and each legal entity applying the simplified taxation regime, taking into account the current minimum wage in order to identify potential threshold issues before they become a tax risk.

Case law

In criminal case No. 761/53346/25, the pre-trial investigation identified at least ten well-structured business groups in which the individuals involved were closely related family members, including spouses, parents and children, siblings, and other close relatives.

According to the investigation, such a business structure was not accidental and indicated:

• the artificial division of business activities to remain within the income thresholds of the simplified taxation regime;
• evidence from social media, including Facebook, demonstrating interaction between the entities, joint events, shared branding, and joint promotional activities that are not typical of independent businesses;
• the absence of geographical separation, with multiple entities operating sales outlets in the same shopping centres, indicating vertical integration under a single coordinating entity;
• signs of coordinated registration of sole proprietors (FOPs), including similar registration dates, territorial jurisdictions, bank account openings, and selection of the same simplified taxation group, suggesting centralised management;
• possible manipulation of primary accounting documents, where the absence of genuine business transactions, services, or supply of goods may indicate that sole proprietors (FOPs) were used as intermediary entities to create a seemingly legitimate documentary trail and generate tax credits.

The investigation also identified:

• the use of the same IP addresses for filing tax returns and registering VAT invoices, indicating administration from a single location;
• the lease of retail premises in the same locations, including shopping centres in Kyiv and other cities, which is characteristic of an organised retail network rather than independent entrepreneurship;
• the use of a common product range, indicating a single procurement and merchandising centre, together with the absence of independent business infrastructure, such as equipment, warehouses, personnel, marketing resources, or independent procurement channels, which contradicts the status of independent entrepreneurs;
• shared contact details, email addresses, and GetContact tags indicating coordination by third parties;
• bank accounts opened with the same financial institutions, suggesting centralised financial management or direction.

In administrative case No. 340/2408/23, the court concluded that a systematic interpretation of Ukrainian tax legislation confirms that registration as a simplified tax payer is indefinite and may only be cancelled by removing the taxpayer from the register in cases expressly provided for by law.

The court further held that such cancellation is only possible following a documentary tax audit, during which the tax authorities establish violations demonstrating that the taxpayer is no longer eligible to remain under the simplified taxation regime.

As demonstrated by current case law, the existence of indicators of business splitting must first be established. Moreover, cancellation of simplified taxation status is not an automatic consequence of business splitting and requires a tax audit together with legally established grounds for such a decision.

Conclusion

Legally compliant and sustainable business structuring is always about substance rather than the number of legal entities or sole proprietors (FOPs) within a business structure.

The mere existence of multiple business entities does not, in itself, constitute a violation of the law. However, where a structure lacks genuine economic substance, a legitimate business purpose, and operational independence, it may become a significant tax risk.

Businesses should be structured so that each entity can independently justify its commercial existence, even if tax optimisation is removed from the equation.