Business Fragmentation in 2026: New Tax Risks, Evolving Regulatory Approaches

Until recently, the issue of business fragmentation was discussed primarily within the professional community of tax advisers and legal practitioners. Today, however, it has become an increasingly common focus of inspections by the State Tax Service, investigations conducted by the Bureau of Economic Security. What makes the situation particularly noteworthy is that Ukrainian legislation still contains no legal definition of what constitutes "business fragmentation." Nevertheless, the concept has already become one of the key instruments used by regulators to assess tax risks and evaluate corporate structures.

The situation may soon change even further. The Ministry of Finance has proposed introducing the concept of tax abuse into the Tax Code, fundamentally shifting the way tax authorities assess taxpayers' activities. If these amendments are adopted, regulators will evaluate not only formal compliance with legal requirements but also the genuine economic substance of business operations.

Where Is the Line Between Legitimate Business Structuring and Artificial Fragmentation?

It is important to emphasize from the outset that operating through several legal entities or individual entrepreneurs is not, in itself, unlawful. For many businesses, such a structure reflects legitimate commercial needs: different business lines, separate investment projects, risk diversification, corporate governance considerations, or contractual requirements imposed by business partners. Accordingly, the key issue is not the existence of multiple entities but whether each of them performs an independent business function or whether they merely represent different parts of a single enterprise divided solely to obtain tax advantages.

What Factors Are Regulators Looking At?

Although Ukrainian law does not establish a formal list of criteria for identifying business fragmentation, a fairly consistent approach has already emerged through court practice, tax audits, recommendations issued by the National Bank of Ukraine, and investigations conducted by the Bureau of Economic Security.

Among the factors most commonly examined are:

• common shareholders, directors, or other related parties;
• shared offices, warehouses, or production facilities;
• common employees or accounting functions;
• identical IP addresses, software, or digital infrastructure;
• the use of the same brand, website, or marketing strategy;
• interconnected financial flows and overlapping customer bases.

None of these factors, viewed in isolation, proves the existence of unlawful business fragmentation. However, when several of them are present simultaneously, regulators may conclude that multiple legal entities actually constitute a single business artificially divided for tax purposes.

How the Tax Abuse Doctrine Could Change the Rules

In my opinion, this legislative initiative may become one of the most significant developments for Ukrainian businesses in recent years. In practical terms, it would shift the focus from formal legal compliance to the economic substance of transactions and corporate structures. For businesses, this means that properly drafted documents and formally compliant corporate structures may no longer be sufficient. If the tax authorities conclude that a particular structure exists primarily to reduce the tax burden, formal compliance alone may not be enough to defend the company's position during an audit or subsequent litigation.

This approach is by no means unique to Ukraine. Similar anti-abuse principles have long been incorporated into the tax systems of many European jurisdictions. Ukraine is only beginning to move in this direction, but businesses should already take these developments into account when reviewing their corporate structures.

Why Companies Should Act Now

Experience shows that the greatest exposure often exists not within large multinational corporations but among small and medium-sized enterprises. Many businesses established their current corporate structures ten or even fifteen years ago, when regulatory scrutiny of fragmentation issues was minimal. Over time, businesses expanded, new companies and sole proprietors were added, operational responsibilities evolved, yet the original structure frequently remained unchanged.

This is precisely why companies should now conduct a comprehensive review of their corporate organisation and ask several fundamental questions. Does each entity perform a genuine commercial function? Can its existence be justified by legitimate business considerations rather than tax optimisation alone? Does it carry out independent business activities, or does it merely serve a formal role within a broader corporate structure?

The answers to these questions are likely to play an increasingly important role during future tax audits and regulatory reviews.