Business Splitting: Where Is the Line Between a Legal Model and Tax Evasion?
The issue of business splitting gained considerable attention toward the end of last year, with news abounding about pre-trial investigations into groups of companies that use splitting to evade taxes and levies. The tax authority is also advancing an unequivocal position that this way of doing business is impermissible, and numerous audits are being conducted with the aim of putting a stop to the practice and penalizing all violators. Meanwhile, the current legislation continues to keep secret what business splitting actually is and where the line lies between legitimate associations of business entities formed to survive in an economically unstable market and pragmatic actions by businesses aimed at deliberately underpaying taxes.
The State Tax Service of Ukraine has clarified on its official websites that the controlling authority understands this concept to mean the artificial division of a single business activity into several formally independent entities — predominantly individual entrepreneurs (IEs) — controlled by the same persons, for the purpose of reducing the tax burden, resulting in significant losses to the budget in the form of unpaid taxes and levies.
The State Financial Monitoring Service of Ukraine, in its typological study "Risks and Threats of Money Laundering and Terrorist Financing in the Context of russian military aggression — 2025," defined business splitting as the artificial division of large or medium-sized profitable companies into dozens or hundreds of IEs operating under the simplified taxation system, noting that this mechanism serves no legitimate business purpose and is used exclusively for tax evasion.
As we can see, the definition provided by the State Tax Service of Ukraine is considerably broader and encompasses the full range of business relationship participants, identifying the following common indicators by which business splitting can be identified:
- the existence of a single decision-making center;
- shared IP addresses, email addresses, and registered addresses;
- the perception by clients of the business as a single entity (shared sales locations, operating under a single trademark, etc.);
- shared representatives and employees.
But does the presence of these generally identified indicators in the outward manifestation of business activity always justify labeling it "business splitting" — a label that automatically conjures associations of illegality and financial penalties?
Consider a situation where such indicators may be present: an individual entrepreneur rents premises in which they conduct retail trade, selling partly goods that they own and partly goods held on consignment from other individual entrepreneurs. All business entities are on the simplified taxation system and additionally rent office space at the address of the shop.
Given these facts and an analysis of the external indicators, such activity could be identified as business splitting — yet in reality these entities are independent of one another, and their nominally shared activity is connected exclusively by commercial relations, cost minimization, and has an economic justification.
Or consider, for example, a limited liability company that has registered a trademark under which it produces and sells food products through catering establishments, and subsequently enters into franchise agreements with individual entrepreneurs, granting them the right to operate under its brand using its business model, technologies, and know-how. Such legal relations naturally involve strict conditions for the franchisor's oversight of the franchisee's activities, which may include review of accounting records and the adoption of management decisions that are binding on the franchisee. Under certain conditions, all franchisees may be on the simplified taxation system.
This model may also, on its face, be identified as business splitting — yet by its very nature it is not, as it involves independent business entities that have voluntarily entered into commercial relations for the purpose of generating profit.
At the same time, no one can claim with certainty that even the examples described above could not be used as a means of concealing or carrying out actions aimed at tax evasion, or that the activities of all the entities involved could not in fact be controlled by a single person.
In the absence of clear indicators and criteria that allow a legitimate business model — created for rapid scaling in order to expand markets — to be distinguished from one aimed at tax evasion, the result is an increase in corruption risks and a greater negative impact on the legitimate sector of the economy. Those operating in the shadows are generally prepared for the risks of excessive oversight by law enforcement and regulatory bodies, unlike the real sector, which, instead of expanding its business, spends resources proving the legality of its actions for years on end.
Tax legislation — which is not known in our country for its stability or predictability — requires at a minimum the pragmatic implementation of new trends through the definition of concepts and the provision of a transitional period for business entities to transform their activities in accordance with the legislator's new vision.
Our state cannot afford to formulate tax policy based solely on pressure from public officials or the authoritative statements of experts.
Business must understand the rules by which it operates, including the tax rules. At the same time, those rules must be established exclusively by law, and liability must be imposed in the manner prescribed by law.
The presence or absence of business splitting for the purpose of tax evasion — as well as the question of whether splitting has occurred in specific factual circumstances — should be investigated and proven not by the tax authority, but exclusively by the Bureau of Economic Security, as it alone has the necessary scope of powers and resources to build an evidentiary basis for proving intent in a person's actions before a court.
In the rush to tout slogans about combating the shadow economy and replenishing the state budget, one must not forget about the systematic approach required of any controlling body and the evidentiary foundation needed for future court proceedings. Otherwise, two parties stand to lose: the state — through failure to receive projected revenues — and small business — in the form of penalties that may not be entirely lawful but which, in all likelihood, cannot be challenged due to a lack of resources. And the shadow economy will remain exactly as it was.
