What's a FOP, and why are the IMF and Ukraine fighting over it?

A tax reform plan that would affect millions has sparked debate in Ukraine over its impact on businesses and everyday workers. A barista seen making coffee in a dimly-lit cafe on Oct. 24, 2022. (Ashley Chan/SOPA Images/LightRocket via Getty Images) Prefer on Google by Liliane Bivings, Luca Léry Moffat Editor's note: A version of this article first appeared in the Ukraine Business Roundup, our weekly newsletter on what's shaping Ukraine's businesses and economy. Sign up here . After months of failing to pass a range of measures needed to unlock billions in stalled donor funding, Ukraine’s parliament made a small dent in the long list of reforms this week. But there was one piece of regulation conspicuously absent from the agenda. As part of a new $8.1 billion International Monetary Fund loan program to Ukraine, the Washington-based fund and Kyiv had agreed to change the way that a sizable portion of Ukraine's working population is taxed. The IMF is asking Kyiv to impose a value-added tax, or VAT, on individuals earning above a certain threshold who work under a status known in Ukraine as a "self-employed entrepreneur," or FOP, for its Ukrainian acronym. But while the government agreed to get the changes through parliament by March 31, the bill is still waiting for cabinet approval. The fund argues that the levy is needed to help the country raise revenue for its war effort and formalize the economy by bringing businesses out of the shadows. But the demand has sparked widespread debate in Ukraine, with many people strongly opposed to the move. Several Ukrainian lawmakers, speaking to the Kyiv Independent on condition of anonymity, said that they expect Ukraine to try to renegotiate the FOP changes next week at the IMF Spring Meetings, a high-level conference, due to their widespread unpopularity. Kyiv had already convinced the IMF to soften the measure during negotiations in January, during which the fund agreed to demote the FOP changes from a prerequisite for the $8.1 billion loan to a box to tick by March 31. Simply put, it’s Ukraine’s version of a self-employed business status, similar to a freelancer or contractor in the U.S., with simplified taxes and reporting. For example, an IT company, instead of officially employing individuals on its staff, pays them essentially as freelancers through their FOP accounts. The self-employed entrepreneur status is widely used by Ukrainian businesses and individuals, in large part to optimize, or in some cases, avoid, taxes. Retail, IT, and service industries, like cafes and beauty salons, rely most on the FOP system in Ukraine, but it can be found across many sectors. Oksana Kuziakiv, economist at the Institute for Economic Research and Policy Consulting, estimates that there are currently 1.6–1.8 million FOPs in Ukraine. Around 80% of full taxpayers work in the public sector, according to Bohdan Slutskyi of the Kyiv-based Center for Economic Strategy, highlighting how many Ukrainians are either FOPs or paid informally. It's a tricky subject. The status offers a lot of flexibility to employers and workers alike, especially in a country with a very complicated labor code and an income tax of around 40%, whereas an FOP only pays 5%. But businesses have been criticized for using it as a way of reducing tax burdens when their companies are too large for entire workforces to reasonably be considered freelancers. The FOP system was originally introduced in the late 1990s to offer small businesses a simple avenue of paying tax to the state, bypassing the then-corrupt revenue service and tax police. The IMF argues, as do some voices in Ukraine, that the system, while innovative at its inception, has since morphed into an easy way to avoid tax. "Ukraine’s narrow VAT base not only reduces VAT collection but also undermines growth and the formalization of shadow activity: the size-based simplified tax eligibility thresholds encourage firms to stay small, which leads to additional distortions," the IMF emphasized in its Ukraine staff report from February 2026. Data analysis from the fund shows a sudden dip in the number of firms registered once the threshold to pay VAT kicks in, suggesting that companies fragment into multiple entities to avoid the fee. Opposition to the change is not just about higher taxes. The proposed reforms would also add additional administrative burdens for those operating under FOP status, beloved for its simplicity. "The proposed changes are unpopular because of the additional administrative resources needed to comply with the change," Kuziakiv told the Kyiv Independent. "The issue is not so much the amount of additional tax people must pay, but the extra procedures necessary to comply," she added. Entrepreneur and activist, Valeriy Pekar, outlined the importance of the system to Ukrainians in a Facebook post , a key forum of debate in Ukrainian society. According to Pekar, the simplified system is about having a simple and corruption-proof way of paying taxes. Introducing VAT under current conditions, Pekar argues, would discourage people from paying taxes, hurt economic freedom, create opportunities for corruption, and damage Ukraine’s economy. But the VAT proposal is only one part of a broader IMF-backed tax overhaul, which includes four new taxes as part of its $8.1 billion program. Ukraine’s parliament approved one tax bill on April 7 — extending the military tax for three years after martial law ends. The country is yet to fully pass the other two, a tax on digital retailers and a tax on small imported parcels. Pressure has mounted in recent weeks for Ukraine to crack on with reforms in order to unlock the linked cash, as a cliff-edge in funding looms. The EU agreed on a 90 billion ($105 billion) loan in December to cover two-thirds of Kyiv's needs in 2026–2027, but Hungary has since backtracked and is blocking the loan — ostensibly over a dispute related to the Soviet-era Druzhba pipeline . The progress this week on EU reforms unlocked 2 billion euros ($2.3 billion) in funding for cash-strapped Kyiv, which will keep the country's finances afloat until mid-year, according to EU Commissioner for Enlargement Marta Kos. Hi there, Liliane Bivings here, business editor at the Kyiv Independent and one of the authors of this piece. Thank you for reading — we hope you enjoyed it as much as we did writing it! While this topic may seem far removed from the war, it reflects the everyday concerns of Ukrainians — less a high-level tax debate than a conversation playing out in cities and across social media. Even in the midst of a devastating war, taxes don’t disappear — and neither does our commitment to bringing you all types of stories about what’s happening in Ukraine. If you’d like to support us in this endeavor, please consider becoming a member of the Kyiv Independent . Luca Léry Moffat Economics reporter