What form of taxation is better to choose for doing business: single tax

During the provision of services at the enterprise level we often advise Clients on choosing of particular taxation system for business not only at the stage of its official registration, but also in the process of any changes.

Choosing the right form of taxation at any stage of activity is important for optimizing taxation, and, as a result, for the final "net" income from doing business.

Today we’ll talk about how to choose the form of taxation that is right for you.

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"Single tax" as the most convenient form of business taxation

If the business activity that you intend to engage in allows you to switch to “Single Tax” (ST) immediately from the date of registration of your business  - this will be the best option. Of course, there are situations when such an option is practically impossible - for example, if the LLC has a foreigner among its founders. However, we will discuss these cases separately in the next articles.

Benefits of Using Single Tax:

• It provides for a relatively lower tax burden and is the most popular and optimum solution when starting a business;
• Convenient in terms of accounting and reporting to regulatory authorities.

However, it is important to remember that the ST system is divided into several groups, each of which has its own specific features.

For example, if you have registered a private enterprise  for operating your business, and plan to provide services to natural persons and other payers of the "Single Tax", then you need to go to the 2nd group of "ST".

What are the benefits: the possibility to pay the Social Security Tax in the amount of 22% of the minimum wage and, in fact, the tax itself in the amount of up to 20% of the  minimum wage.

Limitations of the "Single Tax" of the second group:

• the maximum amount of income during the calendar year may not exceed 1.5 million hryvnias, and the number of employed persons - not more than 10;
• the payer of this group cannot be a legal entity.

If, however, your business activity is to provide services not only to individuals and payers of the same system, but to the organizational and legal form of doing business that you have chosen is a legal entity - an LLC, it will be beneficial for you to choose the 3rd group “ST”.

What are the benefits: the possibility to provide services to legal entities, too, which do not have to be payers of the Single Tax.

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Limitations of the "Single Tax" of the third group:

• the maximum amount of income during a calendar year may not exceed UAH 5,000,000.

Income should be understood as the entire amount of funds that you received from carrying out economic activities, and not just those funds that you have left, as the difference between income and expenses that you incurred during carrying out economic activities.

Additional restrictions of various groups of the simplified system of taxation of business

It is impossible to be a payer of "ST" of the second group if you intend to conduct:

• activities of real estate agencies (KVED (Ukrainian Industry Classification System ) 70:31))
• activities for the production, sale of jewelry and household goods made of precious metals, precious stones.

If we talk about payers of the third group of "Single Tax", the list of prohibited activities is much longer (and also applies to payers "ST" of the first and second groups):

• foreign currency exchange;
• activities related to the organization or conduct of gambling, lotteries, etc.

If you have exceeded the maximum amount of income while being in the second group of “ST” - you are required to switch to the third group of the system, and if you have exceeded the maximum amount of income while being in the third group - you are required to switch to other taxes and fees (General taxation system) .

Important! The transition to another group or form of taxation must be carried out from the next quarter, which follows the quarter in which the excess occurred.

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What to remember while being on a simplified tax system?

If you are just starting a business, you should choose the “Single Tax” if the actual type of your business allows this.

Being on this system, it is important to control the amount of disposable income in order to avoid exceeding it and the obligation to transfer to another group or to the General taxation system.

If you are in doubt about which tax system is better to choose or need any legal advice on tax matters - give us a call!