FOP and the Single Tax: Groups and Obligations under the Simplified System

Opening the status of a sole proprietor (FOP) provides the opportunity to work “for yourself” or cooperate with companies as an independent contractor. For many IT specialists, freelancers, and small businesses, operating as an FOP under the simplified taxation system is an attractive way to conduct professional activities while having a clear understanding of taxation criteria. However, along with the advantages come significant legal and financial risks.

Most newly registered FOPs choose the simplified taxation system (commonly referred to as the single tax regime). The Tax Code of Ukraine provides for four groups of single tax payers (I–IV) with different operational conditions. The most popular for small businesses are Groups I–III (Group IV applies only to agricultural producers).

The groups differ in terms of annual income limits, the permitted number of employees, tax rates, and types of activities:

• Group I – allowed for small entrepreneurs who have no employees and are engaged exclusively in retail trade at markets or in providing household services to the public. The single tax rate is set by local authorities at up to 10% of the subsistence minimum. A Group I entrepreneur pays the tax monthly regardless of actual income.
• Group II – suitable for small businesses providing services or selling goods to the public or to other single tax payers (meaning they can work with FOPs/legal entities on the simplified system). Up to 10 employees may be hired at the same time. The tax rate is fixed, up to 20% of the minimum wage, and is paid monthly.
• Group III – the most flexible and widely used among small business companies. Any number of employees is permitted (no limit). Almost all types of activities are allowed, except those explicitly prohibited by paragraph 291.5 of the Tax Code (such as financial services, gambling, excise goods, and other specific areas). An FOP in Group III may work with both Ukrainian and foreign clients, with individuals and legal entities of any taxation system. The single tax rate for Group III is 5% of income (if the FOP is not a VAT payer) or 3% of income (if voluntarily registered as a VAT payer). The tax is paid quarterly with the submission of a quarterly return. This group is the most popular among IT FOPs and freelancers.

It is important to understand that an FOP is not a legal entity but you as an individual. Accordingly, the entrepreneur is liable for debts with all personal assets. The law (Article 52 of the Civil Code of Ukraine) clearly states that an FOP is responsible for obligations related to business activities with all their property, except property that cannot be seized by law. This means that if a tax debt arises or a court orders payment under a contract, you risk your own funds, car, and other personal assets. Even if the entrepreneur ceases operations (closes the FOP), the debts do not disappear — they remain with the individual.