Transfer of Funds from a Sole Proprietor’s Account to the Proprietor’s Personal Card

The position of the State Tax Service of Ukraine (STS) and the provisions of the Tax Code of Ukraine (TCU) allow funds to be transferred from a sole proprietor’s account to the personal card of a natural person. However, the assertion that “you cannot simply transfer them as your own funds; they must be transferred as net income” arises from the specific wording and the tax authorities’ interpretation of the legal nature of money.

For different taxation systems applicable to sole proprietors, the definition of “net income” carries different weight.

Pursuant to Article 320 of the Civil Code of Ukraine, a sole proprietor has the right to use his or her property for entrepreneurial activity. At the same time, after payment of all taxes and fees, funds received from business become his or her personal property.

From the perspective of the TCU, if you transfer money that has not yet passed through the tax accounting of the sole proprietor (for example, transit funds or unidentified receipts), this constitutes a violation. Tax authorities require that it be the net profit (net income) that is transferred, i.e., funds from which taxes have already been deducted or will be deducted (single tax/military levy, personal income tax/military levy).

Please note that the procedure for completing a payment instruction is governed by the requirements of the regulatory legal acts of the National Bank of Ukraine and the Ministry of Finance of Ukraine. When making such a transfer, it is important to correctly specify the “Payment purpose” field.

For single tax payers of Groups I–III, the procedure for withdrawing funds is the simplest, since their tax does not depend on business expenses.

Pursuant to Article 292 of the TCU, the income of a single tax payer is any income received during the reporting period in monetary form (cash and/or non-cash).

The STS officially explains that an entrepreneur has the full right to transfer funds to a personal account after paying taxes. In the payment purpose, it is permitted to state: “Transfer of the sole proprietor’s own funds to a personal account, without VAT” or “Payment of entrepreneurial income after payment of taxes.” The latter is recommended by banks to be used in the payment purpose. Such transactions are not subject to taxation again.

For taxpayers under the general taxation system, the issue of “own funds” and “net income” is most acute due to the specifics of tax calculation.

Pursuant to Article 177 of the TCU, the object of taxation for taxpayers under the general system is net taxable income. It is calculated as the difference between total taxable income (revenue) and documented expenses directly related to business activity.

If a sole proprietor under the general system transfers funds with the wording “transfer of own funds,” the STS views this as a transfer of funds that have not yet undergone the procedure for determining net income and from which taxes have not yet been calculated (or paid). Tax authorities insist that the right to freely dispose of money for personal needs (including transferring it to a personal card) arises only upon payment of all taxes and fees.

Withdrawal of funds must take place only after the sole proprietor under the general taxation system has recorded income, deducted business expenses for the reporting period (for example, for a quarter), set aside the amount for payment of advance payments of personal income tax/unified social contribution, clearly understands the amount of the net balance in the account, and uses the correct payment purpose: “Transfer of net income from entrepreneurial activity after payment of taxes” or “Income from entrepreneurial activity of the sole proprietor (full name, tax identification number), from which taxes have been paid, for personal needs.”

The biggest problem for a sole proprietor under the general taxation system when transferring funds from a business account to a personal card with an incorrect payment purpose (for example, simply “transfer of own funds”) is the risk of double taxation through the prism of the Tax Code of Ukraine (TCU).

The essence of the double taxation risk is as follows: 

- if the payment purpose states “transfer of own funds” or “card top-up,” such payment loses its “business” designation. During an STS audit of a natural person (or in the event of a bank request within the framework of financial monitoring), the STS views this inflow of money to a citizen’s card not as a transit balance of business income, but as a separate receipt of civil income; 

- if the STS does not identify the payment as net entrepreneurial income, it has grounds to apply Article 164.2 of the TCU (“Tax base for income of natural persons”). Tax authorities may interpret this as “other income” (subparagraph 164.2.20 of the TCU) received by the citizen from another entity (even if the names of the sole proprietor and the natural person coincide, in tax accounting these are different tax statuses);

- as a result, the amount that has already passed through the sole proprietor’s accounting under Article 177 of the TCU becomes subject to repeated taxation at the level of an ordinary natural person at the general rates (Article 167.1 of the TCU): 18% - personal income tax (PIT) and 5% - military levy (ML).