Economic development, not fiscal control: what the “free hryvnia” promises Ukrainian business
12 February 15:05
Contributing to the budget and encouraging entrepreneurship—this is precisely the function that the country’s tax system should perform. That is, in the simplest terms. In practice, things are more complicated. But the search for the optimal tax regime continues, and proposals are emerging. Komersant reports on one of them.
At the end of October last year, an extraordinary event took place in the Kyiv City Council. The capital’s deputies unanimously supported an appeal to the Verkhovna Rada of Ukraine calling for the legislative regulation of the launch of a special fiscal regime called “Free Hryvnia.” Those in the know say that this was the first time in Ukraine’s history that all local government factions voted together to support an alternative fiscal model of the new generation. In three and a half months, this project went from an appeal by the Kyiv City Council to a document submitted to the Verkhovna Rada for consideration: in early February, draft law No. 15009 “On Amendments to the Tax Code of Ukraine Regarding the Introduction of a Special Fiscal Regime ‘Free Hryvnia'” was registered in parliament and sent to the relevant parliamentary committee for review.
Exemption from administration
The “Free Hryvnia” fiscal regime is an innovative model of voluntary taxation that provides for the complete automation of tax calculations and a fundamental change in the tax base. It not only meets the demands of the digital economy, but also creates a fiscal environment focused on development rather than fiscal control. This is how Ihor Opadchiy, a member of the Kyiv City Council and co-author of the concept, describes the new tax model. He also explains some of its features:
“Unlike traditional fiscal systems, which focus on taxing income, consumption, or labor, this model is based on the concept of demurrage—a regular contribution calculated exclusively on the balance of funds in a special account at the end of the calendar month. The demurrage rate is set by the Cabinet of Ministers of Ukraine at a uniform rate for all participants in the regime. In addition to the monthly contribution, the system provides for an exit payment (a fixed percentage in the case of transferring funds to cash or personal accounts), which further encourages reinvestment within the regime.”
Igor Opadchiy, a member of the Kyiv City Council, lists the main characteristics of the tax regime as follows:
- voluntariness: participation in the regime is not mandatory and does not preclude the possibility of working within the current tax system;
- automation: tax obligations are fulfilled automatically through authorized banks, without filing declarations or interacting with tax authorities;
- transparency and predictability: simplified administration rules minimize administrative costs and the risks of subjective interpretation of the rules;
- stimulation of economic activity: the model does not tax income, wages, or transactions — only passivity, i.e., unused balances.
According to the World Bank and PwC’s Paying Taxes study, the average cost of tax administration for businesses in Ukraine is 234 working hours per year, which is one of the highest figures among the 38 countries that are members of the Organization for Economic Cooperation and Development. This translates into more than 29 full working days that businesses spend solely on complying with tax obligations.
The draft law on the introduction of a special fiscal regime, “Free Hryvnia,” proposes a radical change in the interaction between business and the state through automated fiscal administration. This is pointed out by Iryna Barlozhetska, a lawyer at the VB Partners law firm.
“From a professional point of view, the draft law removes key barriers: unpredictable inspections, administrative pressure, and excessive bureaucracy. Legal certainty and the absence of manual intervention create an attractive environment for investment, both domestic and foreign. A World Bank study shows that a 10% reduction in administrative costs leads to a 4% increase in new businesses. For Ukraine, this means thousands of enterprises and a broader tax base without raising rates. Automation through the banking system reduces corruption risks and increases transparency. Entrepreneurs can focus on business rather than tax procedures,” the expert emphasizes.
The proposed model is open to everyone — sole proprietors, small and medium-sized businesses, and foreign companies. Ihor Opadchiy, a member of the Kyiv City Council and co-author of the “Free Hryvnia” concept, continues:
“Any business entity can become a participant, including non-residents who want to work in Ukraine through a simple and transparent system without the risk of administrative pressure. The payer simply opens a special account at a bank and from that moment on operates under the new regime.”
As Ihor Opadchiy emphasizes, the key idea behind the “Free Hryvnia” regime is not to increase tax pressure, but to expand the tax base by stimulating economic activity and reducing barriers to entry into the legal field.
Adapting experience
The idea of such a model was first implemented in Austria, in the town of Wörgl. At the height of the Great Depression, the municipality of this Austrian town introduced local money with a built-in demurrage mechanism, i.e., a “negative interest rate” or a fee for storing money. This stimulated its circulation, leading to a sharp increase in employment, revitalization of local businesses, and improvement of infrastructure within a few months. Today, these ideas are being developed by researchers at the Austrian think tank Unterguggenberger Institute. Their modern analysis was also taken into account in Kyiv during the development of the “Free Hryvnia” concept.
Thus, according to Kyiv City Council deputy Ihor Opadchiy, the “Free Hryvnia” is not an abstract experiment, but an updated technological version of proven ideas, adapted to the digital economy and embedded in the modern legal system.
It is proposed to test the effectiveness of the new tax regime in Kyiv for 36 months from the date of entry into force of the relevant section of the Tax Code of Ukraine.
According to the provisions of the draft law, all proceeds from automated fiscal contributions and initial payments during the pilot implementation period in Kyiv will be credited to the State Budget of Ukraine. Subsequently, 50% of such proceeds are to be transferred monthly to the Kyiv budget in the form of a targeted subsidy.
Based on the results of the capital’s experiment, the Cabinet of Ministers of Ukraine must submit a report to the Verkhovna Rada, on the basis of which a decision will be made on scaling or adjusting the regime.
According to Ihor Opadchiy, a member of the Kyiv City Council and co-author of the “Free Hryvnia” concept, some of the constructive comments from relevant government agencies were already taken into account during the preparation of the draft law. In order to ensure compatibility with Ukraine’s international obligations, the initiators of the draft law appealed to the EU and IMF institutions with a request to provide official proposals and legal recommendations that would ensure the new regime’s compliance with international standards.
At the same time, the authors of the new tax concept do not rule out that the reform may meet resistance from structures that have historically benefited from a complex, opaque, and controlled tax administration system. That is why, according to the initiators of the innovations, the “Free Hryvnia” fiscal regime is based on the principles of openness and competition between models, and its effectiveness must be proven not through administrative resources, but through results — within the framework of pilot testing in Kyiv.
Author: Serhiy Vasilevich
