BUSINESS SPLITTING: HOW TO ASSESS YOUR RISKS BEFORE A TAX AUDIT

Your business operates under one brand, but sales are made by different private entrepreneurs? For a business owner, this may be a familiar operating model. For the tax authorities, however, it may be grounds to examine whether the arrangement conceals an artificial splitting of income to retain eligibility for the simplified taxation system.

A shared brand, in itself, does not establish a tax violation. However, the State Tax Service of Ukraine treats it as one of the indicators it considers, alongside shared staff, centralised management and control over funds.

To assess the risks associated with your business model, you should be able to answer at least three questions:

1. Who actually manages each private entrepreneur’s business activities?
   
   Who selects suppliers, agrees on sales terms, controls the funds and bears responsibility towards customers? If a private entrepreneur merely provides their registration details while another person makes all the decisions, this warrants particular scrutiny.
2. What is the commercial rationale for the arrangement?
   
   What justifies the involvement of several private entrepreneurs: franchising, separate retail outlets, different business lines or a partnership model? Does the actual operation of the business reflect that rationale? Redirecting payments solely because one private entrepreneur is approaching the income threshold creates a significant risk of claims by the tax authorities.
3. Do the documents reflect how the business actually operates?
   
   On what legal basis are the brand, premises and equipment used? Who employs staff, pays expenses and accounts for inventory? Contracts, payments and supporting accounting documents must be consistent with one another and with the actual transactions.

What should you do before a tax audit?

Review the flow of goods and funds, the allocation of functions, and the legal arrangements between the parties. If discrepancies are identified, correct them both in the documentation and in the underlying business processes. Simply adding formal agreements will not eliminate the risks inherent in a business model that operates differently in practice.

If the Ukrainian tax authorities challenge the arrangement, it is essential to establish precisely what violation is alleged, against whom, for what period, and what evidence supports the allegation. A general reference to “business splitting” is not sufficient to substantiate specific additional tax assessments.

The PRAGNUM team helps businesses assess tax risks associated with their corporate and operational structures and defend their position during tax audits and in court.