Choosing a tax system as a sole proprietor

Published 6 August 2020. Some rules have changed since; ask us for the current position.

Starting a business takes a certain boldness, a willingness to take risks and, of course, talent. Have you decided to go into business for yourself? Congratulations! But how do you choose a tax system as a sole proprietor (ФОП, фізична особа — підприємець)? Who has to pay value added tax, and who is exempt? This article explains. Many readers will find it useful, because Ukraine's tax system is one of the most complex around. Add the lack of clear instructions for filling in reporting forms and the constant changes, and the picture gets harder still. That is why the sensible choice is to hand your accounting to specialists with years of experience keeping the books for many businesses on the single tax, across different groups. Below is a short overview of the tax options for sole proprietors.

The main mistake new business owners make when choosing a tax system

In the age of information technology, Google seems like our best friend. The mistake many new entrepreneurs make is trying to work out tax law on their own without legal training. Most people have never even opened the Tax Code. And the internet? It is full of unreliable information, so you have to keep checking laws, regulations and official letters on tax changes. Take it from experience: those changes always catch entrepreneurs by surprise. What business owner has time to follow all of it? So there is one rule: if in doubt, get advice. It costs less in the end.

Even so, of all the tax options, the simplified system is arguably the best fit for sole proprietors, and there are several reasons for that.

Which entrepreneurs is the simplified tax system right for?

The appeal of the simplified system is that you do not pay value added tax (with the exceptions covered below), personal income tax or many other taxes. However, not every sole proprietor can use it. When the question is "How do I choose a tax system as a sole proprietor?", in some cases the single tax (єдиний податок) has to be ruled out.

This usually happens when income is too high. For some activities, the law allows only the general tax system. Non-residents, including foreigners who are not Ukrainian tax residents, cannot use the simplified system either. We advise clients in this position too, and they run successful businesses in Ukraine.

Income is the main criterion, but headcount also matters. Group 1 single tax payers may earn no more than UAH 1 million a year, Group 2 no more than UAH 5 million a year and Group 3 no more than UAH 7 million a year. Group 1 cannot have employees, Group 2 can have up to 10, and Group 3 can employ any number of people.

Who pays VAT and who is exempt?

As a general rule, single tax payers do not pay VAT, except for Group 3. Even in Group 3, if you choose the 5% single tax rate (instead of 3%), you are exempt from VAT.

Want to cut the cost of running your business?

Now is the right time to choose a tax system for your sole proprietorship together with the specialists at Key Solutions, a business accounting services firm. Contact us for qualified help and full-service tax accounting for your sole proprietorship: