Business splitting: will it survive after 2028? Part I

In recent years Ukraine has been actively developing state policy against the artificial splitting of businesses. A GAAR (General Anti-Avoidance Rule) is planned for implementation, and a significant part of it consists of rules countering business splitting.

The topic has moved far beyond narrow professional discussions among accountants and tax advisers and has become one of the central elements of tax policy, banking compliance, financial monitoring and court practice. Many entrepreneurs and business owners still confuse "splitting" with any form of corporate structuring. In reality, the state is not fighting the division of a business as such, but only the form of division aimed primarily at minimising taxes. This distinction matters if you are building a holding, protecting assets, separating operational risks, or preparing the business for an investor or a sale.

Important! The state is not fighting the division of a business as such, but only the form of division aimed primarily at minimising taxes.

This article collects and systematises the core material on the topic: the substance of the fight against splitting, GAAR criteria, ways to prove business purpose, risks of holding structures, the thin capitalisation rule, practical protection tools, sample wording for documents, and recommendations on building an evidence base. The material is divided into two parts. The first covers purely Ukrainian realities: splitting into sole traders (FOP), banking compliance and asset protection inside the country. The second part covers cross-border activity: holdings with a foreign element, transfer pricing, CFC rules, thin capitalisation and GAAR for international transactions.

Contents

• What business splitting is and what the state actually fights
• GAAR: the general anti-avoidance rule
• Who cares about structuring when there is no tax purpose
• How to prove the business purpose of a structure
• Sample wording for a shareholders' resolution
• Evidence of business substance for courts and tax authorities
• Frequently asked questions

What business splitting is and what the state actually fights

In Ukrainian tax practice, business splitting means the artificial division of a single business activity between several formally independent entities — predominantly sole traders (FOP) on the simplified tax system. The purpose of such a construction is almost always the same: to stay within the single tax thresholds, avoid VAT registration and avoid corporate income tax under the general system.

The classic scheme looks like this. A real business — a retail chain, a service company, a manufacturer or a service provider — is formally broken up into dozens or even hundreds of sole traders. Each one stays below the annual income threshold, works on the simplified system and is formally an independent entrepreneur. Nevertheless, all of them operate under one brand and share premises, staff, warehouses, IP addresses, software, the client base and centralised management. The tax authority states plainly: such a construction has no business purpose and is used exclusively to minimise tax liabilities.

Important! When you hear that Ukraine intends to end business splitting once and for all, this mostly refers to splitting businesses into dozens and hundreds of simplified-tax sole traders.

Throughout 2025–2026 the State Tax Service repeatedly reported publicly on large-scale schemes detected in retail chains. In some cases more than eight hundred sole traders were involved, and the potential amounts of underpaid tax ran into hundreds of millions and even billions of hryvnias. These cases shaped current enforcement practice.

The state does not attack every division of a business. Creating separate companies for different lines of activity is not splitting in the tax sense. Nor is it prohibited to structure a business by carving risky activities into separate legal entities to protect assets; to use franchise models where each outlet genuinely belongs to different owners; to form a real partnership of several independent entrepreneurs; or to structure a business to attract investment, sell part of it or enter new markets.

The key difference between problematic splitting and "clean" structuring lies in whether each entity has real economic independence and a non-tax purpose. The tax authority identifies artificiality by a combination of indicators:

• identical IP addresses and devices used to file reports;
• shared employees serving several formally independent sole traders;
• one registered address or actual place of business;
• a single brand and centralised marketing without documented rights to them;
• centralised financial management of the whole group;
• sole traders with no fixed assets or client base of their own;
• the use of "drops" — persons who merely provided their documents to register a sole trader without carrying on any activity themselves.

The more of these indicators coincide, the higher the risk that the whole group is recharacterised as one business, with additional VAT, corporate income tax, penalties and even criminal liability under Article 212 of the Criminal Code.

Banks joined this process independently of the tax authority. The National Bank and commercial banks analyse groups of related parties, shared IP addresses, identical devices used to access online banking, common beneficiaries and transaction patterns. Even if the tax authority has not opened an audit, a bank may block accounts or refuse service, citing financial monitoring risks.

Important! The consequences of ill-considered large-scale splitting: recharacterisation of the whole group as one business, with additional VAT, corporate income tax and penalties, plus the risk of criminal liability under Article 212 of the Criminal Code.

GAAR — the general anti-avoidance rule

GAAR is a universal instrument that allows tax authorities to disregard or recharacterise transactions that formally comply with the letter of the law but contradict its spirit and are aimed primarily at obtaining a tax benefit.

Ukraine has not yet introduced a full GAAR as a separate general rule. Only individual elements exist: the principal purpose test for international transactions (covered in Part II) and the concept of a "reasonable economic reason (business purpose)" in transfer pricing rules. On 24 February 2026 the Ministry of Finance released for public discussion a draft law implementing the ATAD (Anti-Tax Avoidance Directive). That document is intended to introduce a systemic GAAR, with a planned entry into force on 1 January 2028.

Under the ATAD approach and the Ministry's draft, a transaction or series of transactions may be treated as tax abuse if three conditions are met simultaneously. The main purpose, or one of the main purposes, is obtaining a tax benefit — non-payment or partial payment of tax, reduction of a liability, deferral of payment, or obtaining a refund. The transaction is artificial and non-genuine and does not reflect real economic substance. There is no reasonable economic reason reflecting a genuine business need.

Important! GAAR is a residual rule: it applies only where no specific anti-avoidance provisions exist, and it does not prohibit corporate structuring as such. It targets only those arrangements where tax saving dominates and the economic reason (business purpose) is absent or artificial.

If splitting or any other structuring has a real, convincing non-tax purpose, GAAR does not apply to it. Typical protected constructions include dividing a business to manage risks, creating separate legal entities for different activities or regions, preparing to sell part of the business or attract an investor, and a franchise model with genuinely independent owners. We examined these same principles in Lawful tax saving or evasion.

The key question is always the same: would this structure make sense if the tax advantages did not exist? If the answer is yes and it can be proven by documents, calculations and the parties' conduct, GAAR should not apply. That is why the quality of the evidence base becomes decisive.

In European practice GAAR is applied cautiously, respecting the principle of proportionality. The Ukrainian draft worries business precisely because of the broad discretion it grants to the authorities. Experts therefore stress the need for clear criteria and indicators of artificiality, which should be updated and discussed with market participants.

Who cares about structuring when there is no tax purpose

If structuring genuinely has no tax purpose, the tax service is largely indifferent to it. The State Tax Service is interested only where the construction is used to reduce taxes. If there is no tax benefit, or it is minimal and not the main purpose, there are no grounds to apply GAAR or evasion provisions.

Other parties, however, may well care.

Creditors and courts in civil and commercial disputes are the main risk when structuring for asset protection. If a debtor transfers assets to other companies to avoid enforcement, creditors may challenge such transactions as concluded to the detriment of creditors (Articles 234–235 of the Civil Code, rules on sham transactions, special rules in insolvency proceedings). A court may declare the transactions invalid and return the assets to the liquidation estate.

Important! If a debtor transfers assets to other companies to avoid enforcement, creditors may challenge such transactions as concluded to the detriment of creditors.

Banks and financial monitoring look at groups of related parties. Even without a tax scheme they may refuse lending, close accounts, demand additional documents or report to the State Financial Monitoring Service. The National Bank's guidance expressly lists indicators of relatedness: common founders and managers, a shared address, shared use of resources, a single brand.

In insolvency cases the insolvency officer and creditors actively look for artificial asset stripping. "Asset protection" is often viewed negatively here if it was carried out shortly before insolvency or at a time when debts already existed.

Structuring for asset protection is often artificial in form, but the law does not prohibit it outright. A business is entitled to separate risky and safe assets, create holdings, split an operating company from a property-owning company, and use shareholders' agreements, pledges and guarantees. The line is crossed where structuring becomes a deliberate transfer of assets to the detriment of existing creditors (fraudulent conveyance). If you do it in good time, when there are no debts or they are under control, this is normal corporate practice used worldwide. We covered the organisational models of such separation in Internal outstaffing: spin-off vs shared services.

Important! Structuring a business for asset protection must be implemented in advance, not once debts have arisen.

How to prove the business purpose of a structure

Business purpose (a reasonable economic reason) is proven not by words but by a body of evidence showing that the structure makes real economic or managerial sense distinct from tax saving.

It is highly advisable to record the purpose before or at the moment the structure is created. Courts and the tax authority value contemporaneous evidence most, rather than after-the-fact explanations. The necessary documents are: a shareholders' resolution with clearly worded purpose; a business plan or analytical memo with calculations of economic feasibility; email and messenger correspondence and presentations discussing precisely the non-tax purpose; and an opinion of an external adviser (lawyer, auditor, corporate consultant) obtained before the structure was created.

The structure must make sense even absent tax advantages. Typical strong arguments include: asset protection by separating the operating company (risks, contracts, staff) from the property-owning company (real estate, equipment, intellectual property); different activities with different risk levels; preparation to sell part of the business or attract an investor; different regions, brands or client segments; requirements of banks, insurers or licensing authorities; and greater manageability and clarity of the structure for potential partners.

Important! A business structure must make sense even in the absence of tax advantages.

Even where the goal is asset protection, each element of the structure must show signs of independence: its own or clearly delineated assets; separate contracts (lease, supply, services) on market terms; real movement of funds rather than mere transit; separate accounting and liability; and the ability of each entity to exist and generate value on its own, even if in practice they are interrelated. Who exactly keeps the books of each company in the group also matters — see Outsourced accounting alongside an in-house accountant.

Keep a chronology of the creation and changes of the structure, documents on asset contributions, revaluations, shareholders' agreements and evidence that the structure works exactly as intended. Have a ready written position of one or two pages answering clearly: what the specific non-tax purpose of the structure is; why this form rather than another; what economic effect was expected and whether it is being achieved; and why the structure is not artificial.

What works poorly or not at all: generic phrases such as "to optimise management" without detail; documents created after a tax authority request or the opening of a case; situations where all entities are entirely dependent on each other and have no independence whatsoever.

The best defence is preventive. When the structure is created, the "business purpose" document pack is assembled straight away. Then, if questions arise, you are not inventing arguments — you simply present an existing evidence base.

Sample wording for a shareholders' resolution

Well-drafted wording in a resolution or a sole shareholder's decision significantly strengthens your position. Below are detailed practical examples.

Asset protection option (detailed):

"In connection with the expansion of the Company's activities and the increasing complexity of its asset structure, and in order to improve the manageability of the business and create a clear organisational model for banks, insurers and potential investors, it is resolved to separate functions between the entities of the group. Operating activities — namely concluding client contracts, hiring personnel, day-to-day business operations and work with suppliers — remain with the Company. Ownership of real estate, equipment, vehicles and other fixed assets is transferred to LLC "[Name]". The transfer of property is carried out on market terms with an appropriate valuation. The purpose of the structuring is to separate operational and property risks and to bring the corporate structure into line with the requirements of banks and potential investors."

Shorter working option:

"In order to separate operational and property risks and bring the corporate structure into line with the requirements of banks and potential investors, it is resolved to carve out the property complex into a separate legal entity. The Company's operating activities remain unchanged. Tax optimisation is not the purpose of this structuring."

Multi-purpose option (risk separation + investor readiness):

"For the purposes of: (1) separating operational and property risks by isolating higher-risk activities from the ownership of fixed assets; (2) creating a transparent and comprehensible corporate structure for the possible attraction of a strategic or financial investor; (3) improving the manageability of the business by clearly allocating functions between the group's companies — IT IS RESOLVED to create a holding structure consisting of: LLC "[Holding]" as the owner of corporate rights; LLC "[Operating Company]" for the main business activity; LLC "[Property Company]" owning real estate, equipment and other fixed assets. This structuring is undertaken on the basis of economic feasibility, managerial necessity and the requirements of potential investors. Tax optimisation is not the purpose of this reorganisation."

Option for separating lines of activity:

"In order to improve management, reduce risk concentration and enhance operational control, it is resolved to create separate legal entities for different lines of activity: LLC "[Name 1]" — wholesale trade and work with major clients; LLC "[Name 2]" — retail trade and work with end consumers; LLC "[Name 3]" — servicing. Each company will have its own contracts, personnel, assets and bank accounts and will bear independent liability for its obligations. The purpose is the operational separation of business processes and risk management, not tax optimisation."

Always state the full date of the decision and attach a short risk analysis or a reference to the business plan or analytical memo as an annex to the resolution. Do not limit yourself to a single abstract sentence about "optimisation" without those annexes. If the decision is taken by a single participant, formalise the document as a "Decision of the Sole Shareholder". Keep the resolution together with all annexes, calculations and correspondence in a secure archive.

Evidence of business substance for courts and tax authorities

Courts and the tax authority look not at individual documents but at the totality of evidence that together confirms a real economic purpose and the independence of the entities.

The greatest weight is carried by documents created before or during the structuring decision: resolutions of shareholders or the supervisory board; detailed business plans and analytical memos; internal correspondence, emails, messenger communications and presentations; and opinions of external advisers prepared before the structure was created.

Evidence of the real independence of each entity includes: its own or clearly delineated fixed assets, equipment, warehouses, transport, licences and intellectual property rights; its own personnel with employment contracts, a staffing schedule and salaries paid by that very entity; its own client base and suppliers under separate contracts; separate bank accounts and real, non-transit movement of funds; separate places of business; and separate accounting and tax records.

Economic and operational evidence: financial statements showing different profitability, cost structures and risk levels; different business models (wholesale, retail, service, manufacturing); evidence of the ability to set prices independently; and separate insurance, lending and leasing contracts concluded by each entity.

Other important evidence of the absence of artificiality: different IP addresses, different devices, different cash registers and different electronic signatures; different registered and actual places of business; the absence of "mirror" and circular transactions; and the presence of real losses, litigation or other risks at individual entities.

Additionally, testimony of employees, counterparties and managers may be used, along with expert opinions (economic expertise) and opinions of independent advisers prepared before the dispute arose.

Supreme Court practice in comparable disputes on business purpose and the reality of transactions emphasises several important points. Business purpose is the orientation towards an economic effect: growth or preservation of assets, or creating conditions for that. The effect need not actually materialise. What matters is the intention and the rationality of conduct at the moment of the decision. One or two indicators of relatedness prove nothing on their own — their combination is required. Evidence created after an audit begins or after criminal proceedings are opened carries considerably less weight.

Frequently asked questions

Is it lawful to have several sole traders or several legal entities within one group?

Yes. The number of entities means nothing in itself. What matters is whether each has real economic independence and a non-tax purpose, and whether this can be confirmed by documents created before or at the moment of structuring.

How does GAAR differ from the PPT?

The PPT has applied in Ukraine since 2019 and concerns only benefits under double tax treaties. A systemic GAAR following ATAD implementation (planned effective date — 1 January 2028) will extend much further, including to purely domestic transactions.

What damages a business purpose dispute the most?

Documents drawn up after a tax authority request or the opening of an audit. Courts and the tax authority trust after-the-fact explanations considerably less than evidence recorded at the same time as the structuring decision.

Does GAAR concern only large business?

No. There is no formal threshold. The criteria of artificiality and absence of business purpose apply equally to a two-company structure and to a group of dozens of entities.

Part II — coming soon

The second part will cover cross-border activity: holdings with a foreign element, transfer pricing, CFC rules, thin capitalisation and the principal purpose test for international transactions.

Related reading

• Business purpose in transactions with non-residents
• Lawful tax saving or evasion
• Internal outstaffing: spin-off vs shared services
• Outsourced accounting alongside an in-house accountant