This is the second attempt to weaken the financial capacity of communities. The All-Ukrainian Association of Amalgamated Territorial Communities emphasises that any tax changes must be based on the principles of financial decentralisation. However, the proposed Draft Law does not contain any compensatory mechanisms for local budgets, which creates direct risks of losses in single tax and personal income tax revenue.

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The Ministry of Finance of Ukraine has put forward a Draft Law for public consultation which, despite its stated aim of harmonisation with international law, poses significant risks to local budgets. Experts from the All-Ukrainian Association of Amalgamated Territorial Communities (AAATC) have conducted a thorough analysis of the document and conclude that the proposed changes could lead to a direct reduction in single tax and personal income tax revenues, thereby jeopardising the financial capacity of communities.

The ‘Decentralisation’ Portal has studied the position of the All-Ukrainian Association of Amalgamated Territorial Communities regarding the Draft Law ‘On Amendments to the Tax Code of Ukraine and the Law of Ukraine “On Banks and Banking Activities”’. The document provides for the introduction of international automatic exchange of information on income from digital platforms and, most significantly, changes to the taxation of entrepreneurs under the simplified system. As the Association emphasises, these innovations create risks that the state is currently not prepared to compensate for.

Risk No. 1: Loss of the single tax – the main local revenue source

The main concern for the All-Ukrainian Association of Amalgamated Territorial Communities is the provision stipulating that, from 1 January 2027, entrepreneurs operating under the simplified tax system who reach a turnover threshold of UAH 4 million will be required to register as VAT payers. At first glance, this is a matter of state tax administration, but the consequences directly affect local self-government.

The proposed changes could lead to a mass shift of third-group taxpayers from the 5% single tax rate to the 3% rate. The Association points out that, under Article 10 of the Tax Code of Ukraine, the single tax is classified as a local tax and is credited in full to the budgets of communities.

Moreover, an increase in the tax and administrative burden will lead to:

• the shutdown of microbusinesses;
• entrepreneurs artificially underreporting their income to avoid registering as VAT payers;
• businesses switching to less transparent operating schemes.

All these factors have one financial consequence – a direct reduction in revenue for local budgets.

Risk No. 2: Reduction in personal income tax revenue

Experts from the All-Ukrainian Association of Amalgamated Territorial Communities highlight another hidden consequence. An increased tax burden on small businesses will force entrepreneurs to optimise their costs. Most often, this is achieved by reducing official wages.

Consequently, this leads to a loss of personal income tax (PIT) revenue. In 2026, 64% of PIT will be channelled directly into local budgets. For the vast majority of communities, PIT, together with the single tax, forms the foundation of their financial capacity.

Risk No. 3: Growth of the shadow economy

Increasing the tax burden on businesses, particularly under martial law, may encourage some entrepreneurs to move into the shadow economy or to fragment their businesses. The consequences of this include:

• a reduction in tax revenue;
• the loss of legally registered jobs;
• a reduction in resources for regional development.

The shadow economy directly affects the ability of communities to fund their own and delegated powers, provide high-quality services, fund education and healthcare, and maintain infrastructure.

Position of the All-Ukrainian Association of Amalgamated Territorial Communities: Balance between reforms and the financial capacity of communities

The All-Ukrainian Association of Amalgamated Territorial Communities supports the importance of harmonising tax policy with international standards and fulfilling Ukraine’s international obligations. However, the Association emphasises that any tax changes must take into account the principles of financial decentralisation and must not undermine the financial foundations of local self-government.

Lack of compensation mechanisms

The Association is particularly concerned that the Draft Law does not include mechanisms to compensate for potential losses to local budgets. Meanwhile, such changes could place additional financial pressure on communities that are already operating under martial law, working to rebuild infrastructure and provide essential services to the population.

As previously reported, the state participates in the formation of local government budget revenues and provides financial support to local self-government. Expenditure incurred by local authorities as a result of decisions by state authorities is compensated by the state (Article 142(3) of the Constitution of Ukraine).

Lack of financial and economic calculations from the Ministry of Finance

The All-Ukrainian Association of Amalgamated Territorial Communities emphasises that the Ministry of Finance of Ukraine has not provided any calculations on the impact of these changes on local budgets. In particular, the section ‘Financial and Economic Justification’ of the explanatory note to the Draft Law contains no mention whatsoever of potential losses or changes in the volume of revenue to local budgets.

This approach is controversial, as the single tax is one of the key sources of local budget revenue, and its reduction will directly affect the financial capacity of communities. The authors of the Draft Law have effectively ignored the fact that changing the rules for registering VAT payers for entrepreneurs under the simplified system will lead to a redistribution of tax flows. Whilst the explanatory note emphasises the ‘harmonisation’ of legislation with EU standards, the issue of compensating local budgets for losses arising from the likely reduction in single tax revenue remains unresolved and unregulated.

This is the second attempt to reduce the financial capacity of communities

The All-Ukrainian Association of Amalgamated Territorial Communities calls attention to the fact that similar initiatives to divert resources from local budgets have been proposed before.

In particular, in 2024, during the preparation of the 2025 State Budget, a proposal was made to transfer part of the single tax from local budgets to the state budget – up to 40% of the relevant revenue. At that time, the All-Ukrainian Association of Amalgamated Territorial Communities opposed such changes, emphasising the risks of a loss of financial capacity for communities.

Following broad discussion during the budget consultations, these proposals were revised, and the single tax remained within local budgets, enabling communities to retain the ability to fund basic services and support local development.

Now, however, the proposed changes effectively pose this threat once again, as they introduce a new mechanism for the redistribution of resources – this time through the expanded application of VAT and a potential reduction in the single tax base.