What will the increase in military levy in Ukraine affect?

Since December 2024, new tax rules have been in effect in Ukraine, which have become a significant change for individuals, entrepreneurs, and businesses. One of the most discussed innovations is a significant increase in military levy rates, which now applies not only to traditional payers but also to e-residents and individual entrepreneurs.

The increase in military levy rates to 5% for most categories, as well as the introduction of fixed payments for individual entrepreneurs of groups 1–4, has forced many to reconsider their expenses. Businesses have faced an increase in the tax burden, and employees of the “white” sector have faced an actual reduction in income. At the same time, banks, non-banking institutions and controllers of CICs have faced an increase in income tax rates, which may affect their development strategy.

What does this mean in practice? Already now, businesses are actively adapting to the new rules of the game, the burden on accountants is increasing due to new reporting requirements, and employees are experiencing a decrease in net income. Will these changes become a driver of economic stability or, on the contrary, create additional difficulties? Next, we will consider in detail how the new rules are changing the realities of the Ukrainian economy.

Military levy 2025: main innovations and their consequences

The increase in military levy rates, which actually led to an increase in income tax, and new reporting rules have created an additional burden for individuals, entrepreneurs, and businesses.

These innovations were the government’s response to the financial challenges caused by the war and aimed at increasing budget revenues. However, along with positive intentions, the changes have caused a number of consequences that have already been felt by citizens and the business environment. In this section, we will consider what tax changes were introduced and how they affect different categories of taxpayers.

For individuals from December 1, 2024:

• The military levy rate for citizens of Ukraine has increased from 1.5% to 5%, with the exception of those who receive military benefits – for them, the rate remains at 1.5%.
• Consequence: This is actually a significant increase in the tax burden for ordinary citizens. For example, if previously with an income of 50,000 UAH per month, 750 UAH of military levy was withheld, now it is 2,500 UAH. Thus, net income will decrease, which may lead to a reduction in consumer spending. In addition, an increase in the tax burden may lead to employers and businesses, in turn, compensating for these costs by raising prices for goods and services, which in turn will be reflected in inflation and the cost of everyday expenses.

For e-residents from December 1, 2024:

• The military levy for Diya-City participants is also set at 5%.
• Implication: This may reduce the attractiveness of e-residency for foreigners who have viewed Ukraine as a convenient jurisdiction for business.

For individual entrepreneurs from January 1, 2025:

• Groups 1, 2, and 4 now pay 10% of the minimum wage (taking into account the minimum wage of 8,000 UAH, which is 800 UAH per month).
• Group 3 pays 1% of income, which directly depends on the amount of revenue.
• Consequence: This is especially noticeable for entrepreneurs of groups 1 and 2, who work with minimal incomes. For them, this fixed obligation may be excessive, which encourages them to move into the shadow sector or close down their activities.

For CFC controllers from December 1, 2024:

• Military levy increased to 5%, which, together with taxes on CIC profits (18%, 9%, or 5%), significantly increases the total tax burden to 23%, 14%, or 10%, depending on the terms of dividend distribution.
• Consequence: This significantly increases the costs of doing international business through Ukrainian residents, which may encourage them to seek alternative jurisdictions.

For foreign shareholders and dividends from December 1, 2024:

• Military levy has been increased to 5%, and the dividend tax rate has now increased to 14% (instead of 10.5%).
• Consequence: This will increase the tax burden on foreign shareholders, which may reduce their returns from investments in Ukraine. In turn, this may also lead to a review of investment strategies, a search for alternative markets with a lower tax burden, and a decrease in Ukraine’s competitiveness in the international investment market.

For banks:

• An increased corporate income tax rate of 50% has been reinstated for 2024, which is double the standard rate of 25%.
• Consequence: This decision is aimed at increasing budget revenues from profitable banks. However, it may reduce banks’ investment activity and limit their ability to reinvest. As a result, banks may reduce lending, reduce revenues, and reduce their competitiveness in the international market.

For non-bank institutions (except insurance companies) from January 1, 2025:

• The income tax rate increased from 18% to 25%.
• Consequence: This will affect the profitability of financial companies, except for insurance companies, and may cause services to become more expensive for end consumers and, therefore, again for ordinary citizens.

Changes in reporting from January 1, 2025:

• Monthly reporting on personal income tax, military levy, and social security contributions has been introduced since 2025. This innovation requires the preparation of additional reports, more time and resources for data processing, and increased control by tax authorities.
• Consequence: For businesses, this means increased costs for accounting and legal support. Small and medium-sized businesses may face difficulties due to a lack of resources, which increases the risk of fines for reporting errors.

For employees from December 1, 2024:

• White-sector workers now pay more taxes: the total burden on wages has increased from 19.5% to 23%.
• Consequence: This means that the net income of workers has decreased by 3.5%, which directly affects the purchasing power of the population. As a result, workers will be forced to spend less on goods and services, which may reduce consumer demand and lead to a slowdown in economic activity.

Thus, although all these innovations in the tax sphere in 2025 are aimed at filling the budget and supporting military needs, they are accompanied by significant tax pressure for ordinary citizens and white businesses. This increases costs for businesses, reduces employee incomes, and makes it more difficult to conduct business activities, especially for small and medium-sized businesses.

Ways to optimize the tax burden in the new environment

With the increase in tax rates and military levies for individuals and businesses, in particular for foreign shareholders and entrepreneurs, the need to optimize the tax burden is growing. However, despite the increase in rates, there are several options that allow you to reduce tax costs and ensure economic efficiency. Here are some of the main ways to optimize tax:

1. Choosing the optimal tax regime for individual entrepreneurs (IEO)

For individual entrepreneurs, changes in tax policy provide for new taxation conditions, in particular, a military levy of 10% of the minimum wage for individual entrepreneurs of groups 1, 2, and 4. However, entrepreneurs can optimize their tax expenses by choosing the most favorable tax regime.

• Switching to a simplified taxation system can be a profitable option for small businesses, especially if their annual income does not exceed the limit set for each group. In particular, individual entrepreneurs of group 3 can pay only 1% of the military levy, which significantly reduces the overall tax burden.
• Choosing between individual entrepreneur groups: Entrepreneurs who do not exceed a certain income limit can reduce their tax burden by choosing the optimal group, as tax rates can vary significantly depending on the group.

2. Using legal entities for business

For large enterprises and companies, there are opportunities to optimize taxes through the right choice of corporate structure.

• Choosing between a general taxation system and a simplified taxation system for legal entities: If a company can qualify for the simplified regime, this will allow it to reduce tax costs and reduce administrative complexity.
• Structuring your business through holding companies: For businesses operating in multiple countries, establishing holding structures in jurisdictions with more favorable tax conditions can help reduce your tax burden, particularly on dividends. Establishing a holding company can optimize your income and dividend tax costs.

3. International structured taxation

Foreign companies and shareholders can reduce their tax burden through the use of international instruments:

• Setting up foreign companies: If tax rates in Ukraine are too high, businesses may consider registering part of their operations or companies in jurisdictions with more favorable tax conditions. However, it is important to note that Ukraine is actively fighting offshore schemes, so such optimization must be legally correct and meet international standards.
• Transfer pricing: Companies with subsidiaries abroad can use transfer pricing to shift profits to jurisdictions with a lower tax burden. This will optimize tax expenses on profits.

Thus, the increase in military levy rates and other taxes, which came into effect in December 2024, significantly changed the tax burden for both businesses and ordinary citizens. The new conditions create serious challenges, so the key task is to find the best ways to adapt to the new conditions. The use of foreign tax regimes, the right financial strategy and advisory support can help reduce risks and find opportunities even in such difficult circumstances. The Azola Legal Services team is ready to provide legal assistance on tax issues and adaptation to legislative changes so that you can confidently develop your projects even in the face of new tax realities.