How to Become a Sole Proprietor and Pay Taxes in Ukraine

I have been registered as a sole proprietor since 2018.

During this time, I've received income from my startup, course sales, advertising payouts from various platforms, and freelance work.

In this article, I’ve compiled my experience to help you register as a sole proprietor and start your entrepreneurial journey in Ukraine.

What is a Sole Proprietor?

A sole proprietor (individual entrepreneur) is a person who has registered their business in Ukraine as a private entrepreneur.

A sole proprietor works independently without the need to establish a company or hire employees.

This is a convenient way to legally run your own business: providing services, selling goods, or performing work to earn profit.

Sole proprietors have a simplified taxation and reporting system, making this option popular among freelancers, small businesses, and self-employed individuals.

To start working as a sole proprietor, you need to:

1. Submit an application on the Diia portal.
2. Open a business bank account.
3. Receive payment for your work.
4. Submit a tax report.
5. Pay taxes.

We will go through each of these steps.

I'm sharing my experience and the simplest way to set up your work. If your activity is more specific, I recommend consulting a lawyer.

Can You Work Without Registering as a Sole Proprietor?

Yes, you can work without registering as a sole proprietor, but this is only suitable for occasional or irregular income.

In such cases, you need to pay personal income tax (18%) and a military levy (1.5%) on each income.

This is higher than the simplified system for sole proprietors (5%), but it allows you to avoid registration and reporting.

However, if your income becomes regular, it is better to register as a sole proprietor.

Otherwise, the tax authorities may consider your activities as entrepreneurial and require you to pay fines and taxes that were not properly paid.

How to Register as a Sole Proprietor?

Previously, to register as a sole proprietor, you had to visit the tax office, but now everything can be done online for free through Diia.

Diia is a government services portal.

Go to the Diia portal and click "Submit Application."

Next, you need to authorize yourself.

There are several ways to do this:

1. Bank ID
2. Diia.Signature
3. Digital Key
4. Hardware Key

I use Bank ID.

Bank ID allows you to log in using your bank account.

Select your bank from the list.

You will receive a generated QR code, which must be scanned through the mobile app.

In the app, the QR scanner can be found in the "More → QR Code Scanner" section.

After authorization in Diia, we start the process of registering as a sole proprietor.

The first step is to confirm your registration address and provide your UNR.

What is the UNR?

UNR (Unique Registration Number) is a personal number assigned to each citizen of Ukraine.

It consists of 13 characters, for example: 19931223-02213.

UNR is needed to identify a person in state registries, databases, when issuing documents, or receiving government services.

It is a kind of "digital passport" that helps the state keep track of information about each citizen.

You can find your UNR on your ID card or in the full information about your biometric passport in the Diia app.

Next, you need to select your KVEDs.

What are KVEDs and How to Choose Them?

KVEDs (Classification of Types of Economic Activity) is a system of codes used to classify different types of business activities.

Each KVED is a specific code that corresponds to a particular type of activity, such as trade, consulting, construction, etc.

When registering as a sole proprietor, you must select KVEDs that match your main and additional types of activities.

This is necessary so that government authorities know exactly what you plan to do and can tax your income correctly.

The selected KVEDs determine which taxes you pay and which reports you need to submit.

What is the Difference Between Primary and Additional KVEDs?

1. Primary KVED: This is the type of activity that generates the most income and is the main focus of your business. For example, if you are involved in software development and this is your primary source of income, that KVED will be your primary one.
2. Additional KVEDs: These are other types of activities you may engage in, but which are not primary. For example, if in addition to software development you also provide consulting services or engage in trading, these activities would be your additional KVEDs.

The primary KVED determines your main area of activity and can affect your choice of the taxation system and the mandatory reports you need to file.

Additional KVEDs allow you to legally engage in other activities that may generate additional income.

You can choose a KVED from a list or by specifying a number. Here is a list for online professionals.

KVEDs for IT Specialists and Freelancers

1. 62.01 Computer Programming (software development, applications).
2. 62.02 IT Consulting (consultations on IT solutions).
3. 62.03 Management of Computer Equipment (hosting, server management).
4. 62.09 Other Activities in the Field of IT and Computer Systems (website creation, freelance IT services).
5. 63.11 Data Processing, Web Hosting, and Related Activities (cloud services, data storage).
6. 63.12 Web Portals (management and development of web portals).

KVEDs for Bloggers

1. 58.14 Publishing of Magazines and Periodicals (digital magazines, blogs).
2. 63.12 Web Portals (management of blogs and social media platforms).
3. 73.11 Advertising Agencies (monetizing blogs through advertising).
4. 74.20 Photography Activities (photo and video shooting for content).
5. 90.03 Individual Artistic Activities (creating artistic content, art projects).

KVEDs for Experts Selling Their Courses

1. 58.29 Publishing Other Software (creating and selling online courses).
2. 62.09 Other Activities in IT and Computer Systems (creating platforms for courses).
3. 85.59 Other Education (conducting training sessions, courses, seminars).
4. 85.60 Support Activities in Education (consulting, student support).
5. 74.90 Other Professional, Scientific, and Technical Activities (consulting services for course participants).

You can select as many KVEDs as you like.

At the initial stage, it is recommended to choose 3-4 that are most relevant.

You can always add new ones quickly in the future.

Let’s move on.

If you’re reading this article, you’re likely opening a sole proprietorship for the first time, so at this stage, you need to indicate that you have not conducted business activities under the simplified taxation system this year.

Next, we need to choose a taxation system.

IT specialists and online entrepreneurs usually choose the 3rd group of the simplified taxation system.

What is the Simplified Taxation System?

The simplified taxation system is designed for small businesses and sole proprietors.It simplifies accounting and reporting, allowing you to pay a single tax instead of several.

Sole proprietors can choose one of three groups:

1. First Group: No employees, with income up to 1,185,700 UAH per year.
2. Second Group: Up to 10 employees, with income up to 5,921,400 UAH per year.
3. Third Group: No limits on the number of employees, with income up to 8,285,700 UAH per year.

What Happens if You Exceed the Income Limit?

If you exceed the established income limit for your group under the simplified taxation system, it can lead to several consequences:

1. Change of Group: If your income exceeds the maximum for the third group, you will need to switch to the general taxation system or change your tax type.
2. Tax Consequences: You may need to pay additional taxes at the rates of the general taxation system from the moment you exceed the limit.
3. Audits: Exceeding the income limit may increase the risk of tax audits, as such cases often draw additional interest from tax authorities.

Why Choose the Third Group?

The third group is suitable for IT specialists, freelancers, online entrepreneurs, and creators because it allows for higher income, the option to work with VAT, simpler accounting, and the ability to hire any number of employees.

If your activity meets these criteria, choose the third group. If you have doubts, it is better to consult a lawyer.

Next, we select the place of business activity.

If you work online, choose "within the entire territory of Ukraine."

After this, you will be asked to verify all the provided information and submit your application for sole proprietorship registration.Review, submit, and move on.Usually, registering as a sole proprietor takes up to an hour.

After registration, you need to open a bank account for business activities.

How to Open a Bank Account for a Sole Proprietorship?

You can open an account for a sole proprietor at any bank.

I use Mono:

1. I find it convenient to manage both personal and business accounts from a single app.
2. No service fees, low transfer fees, great support.
3. I also accept payments on my website through acquiring by Mono, which makes it convenient to avoid extra intermediaries.

Opening an account with Mono can be done in a few minutes.

I have a detailed article on how a sole proprietorship account works with Monobank.

Useful Links:

1. Opening a regular account with Mono.
2. Opening a sole proprietorship account with Mono.

At this stage, we already have a registered sole proprietorship and an open business account.What’s next?Receive income into your account, submit reports, and pay taxes.

How to Receive Income as a Sole Proprietor?

Generally, you just need to provide the IBAN of your business account to receive payments for services or goods.

Depending on the specifics of your activity, there may be certain conditions for organizing payments.

How do I organize it?

I accept payments on several sites for online courses; for this, I connected WayForPay and Plata by Mono.

I specified my sole proprietorship bank account in these systems for receiving payments.These services process payments and transfer the earned funds to my account daily, withholding a commission.

After the funds are credited to my sole proprietorship account, I can transfer them to my personal account for further use.

It's important to remember that you can only spend funds from your sole proprietorship account on business operations. Therefore, to simplify things, I transfer funds to my personal account.

I also received money from Patreon, then withdrew it to Payoneer, and later to my sole proprietorship account with Mono.

What Taxes Do Sole Proprietors in the Third Group Have to Pay?

Sole proprietors in the third group pay the following taxes:

1. Single Tax: The single tax rate for the third group can be 5% of income if the sole proprietor is not a VAT payer, or 3% of income if the sole proprietor is a VAT payer.
2. VAT (Value Added Tax): If a third-group sole proprietor chooses to be a VAT payer, they must pay this tax at a rate of 20% on the value of goods or services sold.
3. Unified Social Contribution (USC): Regardless of the chosen taxation system, all sole proprietors are required to pay USC. The minimum amount of USC for third-group sole proprietors is set based on the minimum wage and current rates.

What is VAT?

VAT (Value Added Tax) is a tax included in the price of goods and services, paid by the consumer but passed to the state by the seller.

IT specialists and online entrepreneurs usually choose the 5% rate without VAT.

Here's why:

1. Simplification: Not paying VAT means less accounting and simplified tax planning.
2. Clients: If most clients are individuals or small firms without VAT payer status, charging this tax only increases service costs.
3. International Services: For IT specialists and creators working with foreign clients, VAT may not offer benefits due to differences in tax systems.

Third-group sole proprietors may avoid VAT to reduce costs and simplify their financial operations.

In this case, tax payments are made quarterly as follows:

1. You need to pay 5% of the total amount received in your business bank account as a single tax.
2. You must pay USC, which amounts to 1,760 UAH per month; thus, for three months, it will be 5,280 UAH.

To calculate taxes with the income, you need to submit reports to the tax office, indicating how much you have earned.

This can be done in several ways, the most convenient of which are:

1. Through Taxer.
2. Through Diia.

How to Keep Accounting and Reporting for a Sole Proprietor?

I submit reports through Taxer.

Taxer is a service that allows you to automatically calculate and fill out reports, receive notifications about tax payments, check debts, and consult with lawyers and accountants.

The first time will take some time to create and set up an account, but subsequent filing of reports and paying taxes will only take a few minutes each quarter.

Step-by-Step:

1. Create a Taxer account.
2. Add your profile and digital signature.
3. Add your bank account.
4. Enter your income.
5. Submit the report and pay taxes.

How to Use Taxer?

To set up the tax calendar correctly, you need to add a profile and provide information about your sole proprietorship.

Go to "Settings → Profiles."

If you need a step-by-step guide on how to set up a Taxer account, enter your income, submit reports to the tax office, and pay taxes, check out the article in Ukrainian or Russian.

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