The 5% military levy: Meeting IMF requirements and the inevitable risks to a transparent labor market and business
7 May 19:00
ANALYSIS FROM 
By extending the military levy, the Ukrainian parliament has taken a step toward the IMF. But this is not the end of the story regarding this tax. "Komersant Ukrainian" investigated what decisions and changes can still be expected.
The Ukrainian government, which pushed the military tax decision through parliament, can be satisfied—though not entirely. And this is not only because the government proposed a limited-term extension, while the IMF insisted on an indefinite one. Lawmakers, however, agreed only to a three-year post-war term for the military levy, which will begin to be collected from the moment martial law is terminated or lifted on the territory of Ukraine.
Government officials also hoped that the funds, which would replenish the budget annually through the collection of the military levy, would not only allow for maintaining the combat readiness of the Armed Forces of Ukraine after the war but would also help finance the reconstruction and restoration of infrastructure destroyed by the occupiers. However, lawmakers clarified the priorities and insisted on funding exclusively the needs of the military.
Funds for the Armed Forces
The military levy, as provided for by the relevant amendments to the Tax Code, will be credited to a special fund of the State Budget of Ukraine and directed toward meeting the needs of the Armed Forces of Ukraine. The need for such earmarking and use was justified by concerns that the funds could “disappear” into the budget and be used in a non-transparent and irrational manner. But the story of this tax is far from over.
Several legislative proposals are awaiting consideration in parliament regarding the distribution of the military levy and the targeted use of funds: for example, generally for defense needs, including the modernization of military equipment, or solely for the payment of military personnel’s salaries. The draft laws also detail the mechanisms and timelines for implementing the initiative. Nina Yuzhanina, a representative of the parliamentary committee on finance, tax, and customs policy, explained why this needs to be done.
“In order for the provision regarding the allocation of the levy to a special fund of the state budget and its use for the needs of the Armed Forces of Ukraine to be effective rather than merely declarative, these changes—which I have registered—are necessary. One of them concerns the second half of 2026 and involves amendments to the state budget. These amendments specify the use of funds, as it is already very difficult to intervene in the plans of the Ministry of Defense. The amendments state that the funds are to be used to increase monetary allowances. Next, changes are needed to the Budget Code for the following year—specifically, the removal of this item from the general revenue of the state budget, the allocation of this levy to a special fund, and the specification of which program and which expenditures this levy should be used for as early as 2027. “This is a monthly indexation of military personnel’s pay,” the expert notes.
One of the draft laws, “On Amendments to Section VI of the Budget Code of Ukraine Regarding the Allocation of the Military Levy to a Special Fund of the State Budget” (Reg. No. 15167), received the support of the Budget Committee on April 6. It has been recommended for adoption as a basis and in its entirety.
Allocating funds received from the military levy to a special budget fund, of course, provides confidence that the funds will be used for a clearly defined purpose. However, it is worth remembering that virtually all funds in the Ukrainian budget are currently directed toward military needs. This is emphasized by Oleg Getman, coordinator of the expert groups at the Economic Expert Platform.
“Right now, absolutely all taxes—VAT, the military levy, personal income tax—are going toward funding the army. 95% of all expenditures go exclusively to defense. Everything else is funded by international aid. This includes education, healthcare, and even pensions, at least partially. And nearly all other expenditures—social programs, IDPs—are funded by international aid. So this decision to allocate funds solely for military needs was already being implemented even without this additional provision,” the expert explains.
Military Levy or VAT
The more than 140 billion hryvnias from the military levy, which will replenish the Ukrainian budget every year, is a stable, transparent, and easily calculable source of revenue. That is why IMF lenders, who constantly insist that Ukraine find its own sources of funding, proposed making this levy permanent. Parliament did not agree to the indefinite option. And there is not only a symbolic but also a practical explanation for this disagreement. People’s Deputy Nina Yuzhanina continues.
“This would send the wrong signal to the legitimate business sector. It is important to understand that the military levy is a quasi-tax on personal income. And when businesses are told that their payroll expenses are steadily rising, things start to shift immediately—some go underground, others switch to different operating models. That’s why it was crucial to show legitimate businesses specifically that this tax—this quasi-tax—won’t be permanent,” the expert notes.
Oleg Getman, coordinator of the expert groups at the Economic Expert Platform, believes that the military levy has not yet been permanently abolished. In his view, once martial law ends and the country is no longer so dependent on international creditors, it will be possible to make more optimal decisions.
“As economists, we once proposed raising the VAT, which would have been an even burden on everyone, not just on employees—those who now pay this 5% from their salaries. But, unfortunately, this decision was made at the insistence of the President’s Office and the IMF. At the same time, there are studies by reputable scholars showing that indirect taxes are significantly less harmful to the economy than direct taxes. And VAT is precisely an indirect tax. VAT applies to all segments of the population. Moreover, even those who use shadow economy schemes pay it. Because they go to the supermarket or the gas station and pay VAT anyway. Furthermore, this indirect tax is easier to administer. At the same time, payroll taxes were already very high in our country. And the level of shadow employment is about 30%. And the military levy further increases shadow employment,” the expert notes.
As a reminder, the current tax burden on the payroll fund for Ukrainian employees is 45 percent: 22% social security tax plus 18% personal income tax plus 5% military levy. And the existence of such a burden leads to an increase in “under-the-table” salary payments.
