Grants for sole proprietors: taxation

The law contains no single answer along the lines of "a sole proprietor’s grant is not taxed". Everything depends on two things: who pays and which tax regime the entrepreneur is on. The sources are set out below with the numbers of the Tax Code provisions, which are worth rereading in their current wording before signing an agreement.

State grants: eRobota and other budget funds

For single-tax payers the relevant rule is subparagraph 4 of paragraph 292.11 of the Code: income does not include earmarked funds received from budgets, state special-purpose funds or compulsory state social insurance funds, including under state or local programmes. This is the provision the tax service relies on when it says in its explanations that the Vlasna Sprava microgrant and other eRobota grants under Resolution No. 738 are not income of a single-tax payer and do not count towards the group limit. The Code has no separate article on eRobota, so this is an interpretation of a general rule rather than a dedicated exemption.

As an individual, the recipient does not pay personal income tax or the military levy on such amounts either: the tax service applies subparagraph 165.1.1 on state aid from budgets and social insurance funds. These conclusions are known from individual tax rulings, which formally bind only the person who obtained them.

Do not confuse this with a budget grant. In the Code that is a narrow term (subparagraph 14.1.277-1): earmarked aid in culture, tourism, the creative industries, sport and other humanitarian fields from providers listed by the government. Such a grant is not included in a single-tax payer’s income (paragraph 292.1), is not subject to personal income tax provided it is used for its purpose (paragraph 170.7-1), and is not part of the income of a sole proprietor on the general regime (subparagraph 177.3.2).

A grant from a foreign donor or a foundation

Here there is no direct rule, and the position is ambiguous. Paragraph 292.1 defines a single-tax payer’s income broadly, as income received in monetary, tangible or intangible form, and the list of exclusions in paragraph 292.11 does not mention a grant from a non-state or foreign source. The cautious approach is therefore to assume the grant may be counted as income. For group 3 that means single tax at 5% (or 3% with VAT), a military levy of 1% of income and, most importantly, the amount counting towards the annual limit: 167 minimum wages for group 1, 834 for group 2 and 1,167 for group 3. A large grant can push you out of the group.

There is an opposite argument: a grant is not payment for goods or services, so it is not income from business activity but income of an individual. In that case it is taxed as other income: personal income tax at 18% and the military levy at 5%, with an annual return filed if the payer is not a Ukrainian tax agent. Which approach will be applied to you depends on the wording of the agreement, so it is worth requesting an individual tax ruling before the funds arrive.

A sole proprietor on the general regime includes the grant in income and reduces it by documented expenses related to the activity.

An individual without sole proprietor status

If the grant goes to a person rather than an entrepreneur, the general rule applies: anything not listed in Article 165 is taxable income. The rates are the same, 18% and 5%. The exemptions include grants within research projects carried out under international treaties and registered under the law on scientific activity, and budget grants. If the payer is a Ukrainian organisation, it withholds the taxes as a tax agent, and a subgrant provider has to budget for them.

Charitable aid is a different instrument with its own rules in paragraph 170.7. Calling a business development grant charitable aid to avoid tax will not work: such aid is given by benefactors for purposes defined by law, not against a business plan.

What to write in the payment and common mistakes

• The payment reference should carry the number and date of the grant agreement and words about earmarked non-repayable funding, not "payment for services".
• A business grant lands on a personal card: the tax office sees income of an individual, while the entrepreneur’s expenses are left without a source.
• The grant amount is not included in the limit forecast, and the excess comes to light in December.
• There is no separate record of grant expenses, and nothing to prove the funds were used for their purpose.