Tax Evasion Scheme Uncovered in Zakarpattia Region

In the Zakarpattia region of Ukraine, law enforcement officials have revealed a case of tax evasion organized by the director of a private company engaged in the production and sale of bakery products. According to information released by the press service of the Bureau of Economic Security (BEB), this scheme operated from 2022 to 2023 and involved the artificial fragmentation of the business to minimize tax obligations.

The director of the enterprise enlisted seven individual entrepreneurs who operated under a simplified taxation system and were not registered as value-added tax (VAT) payers. This arrangement enabled the director to underreport profit tax and VAT, as the actual business activities were conducted under the control of the organizer, while the product sales were documented through the controlled entrepreneurs.

The primary enterprise did not report the income it received in its financial statements, allowing it to evade tax payments. As a result of this illicit activity, over 10.9 million hryvnias in income remained off the official records. Consequently, more than 4.2 million hryvnias in taxes were not paid to the state budget, including nearly 2 million hryvnias in profit tax and over 2.1 million hryvnias in VAT.

The director has already been notified of suspicion under Part 1 of Article 212 of the Criminal Code of Ukraine, which pertains to deliberate tax evasion in significant amounts. During the pre-trial investigation, the damages incurred by the state were fully compensated, which provided grounds for the submission of a motion to the court for the individual’s exemption from criminal liability.

Moreover, the entrepreneurs who participated in this scheme have been advised on how to eliminate the identified risks. Specifically, they were recommended to cease using individual entrepreneurs for business fragmentation and to transition to a transparent operational model utilizing a legal entity, such as a limited liability company (LLC).

It is worth noting that recently, the BEB in the Odesa region uncovered another entrepreneur who organized a similar tax evasion scheme using individual entrepreneurs. This individual sold flowers through a network of stores, with payments made without the use of cash registers and in cashless form, transferring funds to the accounts of over thirty controlled individual entrepreneurs. This mechanism allowed him to evade over 10 million hryvnias in taxes.

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