The Consequences of Operating Without the Right KVED Code: Key Business Risks

Many companies view KVED codes as a purely formal detail required only when registering a business. In practice, however, situations often arise where a company starts a new business activity, enters into contracts, receives payments from clients, and effectively operates in a new market, but fails to add the relevant KVED code to the Unified State Register.

A common business approach is straightforward: if the law does not expressly prohibit a particular activity, the absence of the relevant KVED code does not matter. To some extent, this is true. However, in practice, the absence of a required KVED code can create a number of issues when dealing with tax authorities, banks, licensing authorities, counterparties, and potential investors.

That is why keeping KVED codes up to date should be viewed not as “paperwork,” but as one of the key elements of a company’s comprehensive legal security

What Is a KVED Code and What Is It Used For?

A KVED code is a code identifying a type of economic activity under the Classification of Types of Economic Activity DK 009:2010. During state registration, a legal entity or individual entrepreneur determines:

1. The main type of economic activity: this is the type of activity that is primary for the business entity based on its economic indicators. In practice, it is often determined by the largest share of revenue, volume of work, or resources involved. Officially, a company may have only one main KVED code.
2. Additional types of economic activity: a list of codes that potentially covers all related, auxiliary, or alternative areas of the company’s operations. The law does not limit the maximum number of additional KVED codes that may be entered in the register.

Information on KVED codes is entered into the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations (USR) and is publicly available to counterparties, government authorities, and banks.

At the same time, it is important to understand that a KVED code itself does not grant the right to carry out a particular type of activity and does not replace a license or other permits if the relevant activity is subject to licensing. Likewise, the absence of a particular KVED code does not always mean that it is impossible to obtain a license for the relevant business activity.

For example, even if your USR record does not include a KVED code for electricity supply or electricity sales, the relevant licenses will still be issued. The separate issue, however, is that payments with a purpose related to the sale and supply of electricity may raise questions from the tax authorities.

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Is It Prohibited for Companies and Entrepreneurs to Operate Without the Relevant KVED Code?

There is a common misconception that the absence of a relevant KVED code automatically makes business activities unlawful. In reality, in most cases, the absence of a particular KVED code in the USR does not invalidate contracts that have been entered into or prohibit the relevant activity. However, although the mere absence of a KVED code does not formally constitute a violation of the law, such incomplete information can create significant legal risks.

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Main Risks and Consequences of Operating Without a KVED Code in Ukraine

Tax risks for individual entrepreneurs and legal entities

For legal entities on the general taxation system, the absence of a relevant KVED code is generally not grounds for additional tax assessments or for a business transaction to be disregarded for tax purposes. At the same time, a discrepancy between the company’s actual activities and the information recorded in the USR may attract the attention of banks, counterparties, and regulators during compliance checks and financial monitoring procedures. However, if you are a single taxpayer, the situation is more nuanced.

For individual entrepreneurs on the simplified taxation system, the consequences depend on the tax group. For individual entrepreneurs in Groups 1 and 2, income from activities not specified in the register of single taxpayers is subject to tax at a rate of 15% under subparagraph 2 of paragraph 293.4 of Article 293 of the Tax Code of Ukraine. Separately, subparagraph 7 of subparagraph 298.2.3 of Article 298 of the Tax Code of Ukraine requires a single taxpayer to switch to the general taxation system if they engage in activities not specified in the register of single taxpayers. (Tax Code of Ukraine).

For legal entities, the situation is somewhat different. For legal entities that are Group 3 single taxpayers, the risk should likewise not be reduced to whether a KVED code is present in the USR. It is important whether the relevant type of activity is specified in the register of single taxpayers and whether the actual activity falls within the types of activities incompatible with the simplified taxation system. If a legal entity carries out an activity that is not specified in the register of single taxpayers, this may result in a mandatory transition to the general taxation system under subparagraph 7 of subparagraph 298.2.3 of Article 298 of the Tax Code of Ukraine. At the same time, the application of the simplified taxation system may be called into question if the entity actually carries out an activity that, under Article 291 of the Tax Code of Ukraine, does not qualify for the simplified taxation system.

For example, if a legal entity has KVED 62.01 but actually receives income from marketing services without adding the relevant KVED code to the USR, this does not by itself mean that it has engaged in an activity prohibited under the simplified taxation system. However, if the legal entity begins carrying out an activity that, under Article 291 of the Tax Code of Ukraine, is incompatible with the simplified taxation system altogether, paragraph 293.5 applies, along with the obligation to switch to the general taxation system under subparagraph 5 of subparagraph 298.2.3 of Article 298 of the Tax Code of Ukraine.

Thus, the risks for single taxpayers are higher than for corporate income tax payers on the general taxation system.

Banking risks and financial monitoring

Banks pay particular attention to analyzing their clients’ activities as part of financial monitoring procedures. If a company carries out transactions that were not reflected in the stated purpose of its activities when the account was opened or when its information was updated, the bank may regard such payments as unusual.

What do KVED codes and the USR have to do with this? A bank may raise questions as early as the account opening stage, for example, why the information in the Unified State Register indicates one type of activity while the stated purpose of the account involves transactions of a somewhat different nature. In fact, such a question may arise whenever “unusual” payments are received.

This may result in enhanced monitoring of the client’s activities. As a result, the bank may process a transaction not immediately, but over the course of a day or even several days. In addition, the financial institution may require documentary evidence of the transaction, such as copies of contracts and invoices. This creates significant administrative burdens, delays settlements with counterparties, and requires prompt involvement from the accountant.

In more complex cases, such “unusual” activity may become an additional risk indicator when the bank assesses the client.

Contractual and corporate risks

Modern businesses are increasingly conducting compliance checks on their counterparties. One of the first sources of information used for such checks is the USR. When the other party, the counterparty, notices that a company offers services or goods that do not correspond to its registered KVED codes, this may raise doubts about:

• the provider’s experience and competence;
• the legality of carrying out the relevant activity;
• whether the necessary permits are in place;
• the overall reliability of the business.

Such situations arise particularly often when participating in tenders, obtaining financing, entering into major contracts, or undergoing corporate compliance checks.

Specific KVED Compliance Requirements for Certain Business Activities

There are areas of business where it is particularly important to keep information about the company’s activities in the USR up to date. This primarily applies to licensed and other regulated types of business activity.

Although the law does not always require a specific KVED code as a mandatory condition for obtaining a license, it is advisable for the information in the USR to correspond to the company’s actual activities. Questions regarding discrepancies between KVED codes and actual activities most often arise during:

• bank financial monitoring;
• counterparty checks, including KYC and compliance procedures;
• participation in public procurement and tenders;
• corporate audits conducted by investors or business buyers;
• legal due diligence.

It is precisely in these situations that keeping information about the company’s activities up to date often has practical significance.

At the same time, in certain sectors, the relevant KVED code is a prerequisite for licensing. This primarily concerns the education and financial sectors.

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What to Do If a Business Is Already Operating Without the Required KVED Code

If a company is already carrying out activities that are not covered by its registered KVED codes, it is advisable to resolve the issue as soon as possible by updating the necessary information in the USR.

From a practical perspective, the procedure is as follows. In most cases, changing KVED codes does not require amending the articles of association if the articles contain a broad list of business activities or are based on model articles. To register changes to the information about a legal entity, an application and a decision of the authorized management body, such as a general meeting or a sole participant’s decision, must be submitted to the state registrar, either in person, through a CNAP, or electronically via the Diia portal.

The registration must be completed within 24 hours after the documents are received, excluding weekends and public holidays. For legal entities, state registration of changes to the information in the USR generally requires payment of an administrative fee, the amount of which is determined by law as of the date of application. For individual entrepreneurs, the procedure and cost of making changes should be checked separately, as not all registration actions are subject to a fee.

Please note! If the business entity is a single taxpayer, updating the KVED code in the USR does not by itself change the information in the register of single taxpayers. A separate application must be submitted to make changes to this register, specifying the new or amended types of activity. For Group 3 single taxpayers, such an application must be submitted no later than the last day of the quarter in which the changes occurred, in accordance with subparagraph 298.3.1 and paragraph 298.6 of the Tax Code of Ukraine. These two steps do not replace each other.

The sooner the company’s actual activities are brought into line with the information in the USR, the fewer risks are likely to arise during inspections and interactions with banks.

As we can see, a KVED code is not merely a statistical code or technical information in the USR. It is an important element of a business’s legal infrastructure and affects the company’s interactions with banks, tax authorities, licensing authorities, and counterparties.

The law does not provide for a direct fine for the absence of a KVED code, but the associated risks are indirect and quite real. Therefore, before launching a new business activity, it is worth checking whether the company’s actual operations correspond to its registered KVED codes. Timely updating of the information in the USR and, where necessary, in the register of single taxpayers helps minimize legal risks and avoid unnecessary problems in the future.

Legal Services for Updating Information About a Legal Entity and Individual Entrepreneur

If your company is already carrying out a new type of activity or is only planning to launch one, our lawyers can help you avoid unnecessary legal risks. We can:

• analyze whether the registered KVED codes correspond to the company’s actual activities;
• determine which KVED codes should be added based on the company’s current and planned business activities;
• prepare and assist with registering changes in the USR;
• provide recommendations on minimizing risks when dealing with banks, counterparties, and regulatory authorities.

A comprehensive review before launching a new business activity helps avoid unnecessary expenditure of time and resources and ensures proper legal support for the company’s development.

Are you unsure whether your company’s registered KVED codes correspond to its actual activities? Contact us today. Our lawyers will conduct an initial assessment of your situation and advise you on what changes should be made to avoid problems in the future.