Fight against fictitious entrepreneurship

A simplified tax system is often abused to conceal labor relations at the enterprise, formalizing “actually employed persons” by “physical persons-entrepreneurs”. To avoid this, we recommend making changes in the Tax Code of Ukraine regarding the fight against fictitious entrepreneurship, namely, to introduce a list of criteria for determining fictitious entrepreneurship of individuals (drawing on the successful experience of Germany).

In the framework of the Tax Reform-2016, we already proposed to make the appropriate changes, but, unfortunately, they were not taken into account. We believe that this issue is of great importance from the point of view of the competitiveness of honest taxpayers and requires the introduction of appropriate changes to the Tax Code.

Thus, we wanted to propose an improvement in the provisions of the NKU by introducing a list of criteria for determining fictitious entrepreneurship of individuals, if two or more of which correspond to, the physical person will be deprived of the right to engage in entrepreneurial activity on a simplified taxation system for the period provided for in Article 299.11 of the Tax Code. Based on the relevant practice and German legislation, we want to offer a list of criteria that will indicate the signs of fictitious entrepreneurship of individuals.

We propose to add p. 291.5 of article 291 of the Tax Code of cl.291.5.9, which establishes the criteria for determining fictitious entrepreneurship of individual taxpayers of the single tax., The persons who meet two or more of the following criteria, cannot be payers of a single tax of the first to third groups:

  • perform services, provide services (including intermediary services for the purchase, sale, lease and valuation of immovable property (group 70.31 KVED DK 009: 2005)) or deliver goods to one legal entity or several legal entities that meet the criteria of related persons as specified in p.14.1.159 of the Code for the period of time exceeding 6 months, while such works/services may be performed (goods to be supplied) for several projects or contracts simultaneously or sequentially;
  • receive income from the supply of goods, works, services to one legal entity or several legal entities that meet the criteria of related persons specified in cl. 14.1.159 of the Code in the amount exceeding 85% of the income of such individual entrepreneur within the period of time lasting more than 6 months;
  • perform work and/or provide services similar to those of full-time employees of a legal entity to which such individual entrepreneur provides work/services;
  • in the conduct of economic activities for the supply of goods, the performance of work, the provision of services are subject to internal instructions and the working order of the legal entity to which such individual entrepreneur supplies goods, provides work/services;
  • do not have their own/leased space for the implementation of economic activities for the supply of goods, the performance of work, the provision of services and carry out their activities in the territory of a legal entity to which such individual entrepreneur delivers goods, provides work/services or in the territory of other legal entities that are related to such a legal entity (cl. 14.1.159 of the Code);
  • carry out economic activities to supply goods, perform works, provide services using property (telephones, computers, printers, faxes, furniture, cars, office supplies, overalls, gasoline, etc.) owned by a legal entity to which such individual entrepreneur supplies goods, provides work/services, and/or with the use of property of other legal entities that are related to such a legal entity (cl. 14.1.159 of the Code);
  • before the beginning of the registration of a natural person by an entrepreneur on a simplified taxation system, such an individual was a staff member of a legal entity to which such individual entrepreneur supplies goods, provides work / services, or was a staff member of other legal entities that are associated with such a legal entity (cl.14.1.159 of the Code).

We also propose to supplement clause 299.10 of Article 299 of the Tax Code with a paragraph establishing liability in the case of the identification of the compliance of a physical person-entrepreneur with the criteria of a fictitious business (it is the reason for the cancellation of registration of such a single entrepreneur by a payer of a single tax):

299.10. The registration of a single tax by a payer is perpetual and can be annulled by eliminating a single tax from the register of payers by a decision of the supervisory authority in case of compliance of a physical entrepreneur at the same time with two or more criteria specified in cl.29.2.9 of p.291.5 art.291 of the Tax code.