Over 55% of Companies Unable to Compensate Employees for Increased Military Tax, EBA Survey Reveals
An increase in the military tax rate to 3% or 5% cannot be compensated by 55% of companies, which will lead to a decrease in real income for employees, according to the results of an express survey conducted by the European Business Association (EBA) among its member companies regarding the potential increase in the tax burden on employers.
According to information on the EBA website, this refers to draft laws No. 11416-d concerning amendments to the Tax Code regarding taxation features during martial law and No. 12000 about the state budget of Ukraine for 2025, which propose raising the military tax rate from 1.5% to 5%.
If the military tax rises to 3%, only 15% of companies are ready to fully compensate the difference at the next salary review, while 14% are willing to do so partially. The remaining 7% are considering the option of full compensation by introducing an additional payment until the end of the year when martial law is lifted.
It is noted that if the military tax increases to 5%, a slightly smaller number of companies (14%) are fully prepared to compensate for the decrease in employees' real income, while 13% can do so partially. Another 6% are ready to fully compensate the additional payment until the end of the year when martial law is lifted.
Other companies are considering various approaches to compensation or have not yet made a corresponding decision.
Moreover, 58% of surveyed companies estimate that an increase in the base for the Unified Social Tax (UST) from 15 to 20 minimum wage amounts (affecting salaries up to 160,000 UAH) will significantly impact company expenses.
The EBA emphasized that, in general, an increase in the tax burden—potential increases in VAT, military tax, and UST—will force 56% of surveyed companies to cut other essential operating expenses. For 11% of companies, such an increase may lead to partial production or business cuts.
"The business community is also wary of the idea of increasing the VAT rate, as this step could stimulate smuggling and illegal trade rather than combatting the shadow economy. When assessing the impact of a VAT increase, it is essential to consider not only the purely fiscal effect but also to predict its impact on the Ukrainian economy in the medium and long term," the EBA stated.
Regarding alternatives to increasing VAT, businesses support the proposal to tax VAT on imported goods valued up to EUR 500 in accompanied luggage and up to EUR 150 for postal and express shipments that are exempt from taxation.
"The EBA reiterates the untapped fiscal potential of the shadow economy. Any tax increase for conscientious businesses should be preceded by effective efforts to combat the shadow economy and taxation of the part of the business that does not pay taxes at all or uses schemes for optimization," the association concluded.
The express survey was conducted from October 1 to 3, 2024, among EBA member companies, with 71 companies from various sectors participating; of these, 79% were international companies and 21% were Ukrainian; 48% were large enterprises, 44% medium-sized, and 8% small.
As previously reported, the Verkhovna Rada (Parliament) approved in the first reading the revised resource draft law No. 11416-d on increasing the military tax from 1.5% to 5% starting October 1. It is anticipated that the inclusion of a provision to increase the profit tax for banks by 50% in the draft law, supported by the Ministry of Finance, will yield UAH 58 billion for the state budget for 2024 and UAH 137 billion for the state budget for 2025.
In addition to the EBA, the draft law has been criticized by the Ukrainian Federation of Employers (Fru), the Ukrainian Startup Fund (SUP), the American Chamber of Commerce in Ukraine (AmCham), the Independent Association of Banks of Ukraine (NABU), and the Forum of Leading International Financial Institutions (FLIFI).
