Thomas Otten, Bohdan Slutskyi, Daryna Romanchuk, Maria Repko
Abolishing of the VAT exemption for the simplified tax system – summary of results
Ukraine
Policy Briefing PB 01 01| 2026
Governance und öffentliche Verwaltung
Content
Introduction
Overview of the current system
STS impact on shadow economy and tax evasion
Statistical evidence of the misuse and tax avoidance
The VAT reform proposal under STS
Impact analysis of the STS VAT reform
Implementation challenges
Policy recommendations
Annex
Motivation
» STS reform is a priority under the IMF–Ukraine EFF, with mandatory VAT registration for
simplified tax system (STS) taxpayers above the UAH 1 m threshold planned for 2027.
» Originally designed to support genuinely micro-scale businesses growth, STS is misused
by larger firms to remain within the regime and outside the VAT system.
» Sales to non-VAT registered private entrepreneurs (PEs) under STS act as structural
breakpoints in the VAT сhain, where invoice-based traceability ends before reaching the
final consumer.
» This weakens transaction traceability, particularly in goods-related activities involving
undeclared, or grey-imported products and enables tax avoidance practices.
» PEs under STS reported around UAH 2.5 tn (~EUR 50 bn) turnover in 2024.
» A limitation of the analysis is that it relies on 2024 data, as the available statistics on the
distribution of PEs by number and turnover are reported for 2024
