“A lobbyist should pay taxes, but should not pay a tax for the state’s uncertainty”

For the first time, Ukraine has a legally regulated lobbying institution. This is an important step for a country that wants to move from shadow influence to transparent, professional and accountable interaction between business, the public sector, the expert community and the government. Lobbying should no longer be perceived as a backroom deal or “informal access”. In a modern state governed by the rule of law, it should be a legal professional activity in which it is clear who is acting, in whose interests, on what issue, under what contract, and with what reporting.

But any new institution does not start working when it is simply written into law. It begins to work when practical rules are created for it: registration, contractual, ethical, reporting, financial and tax rules. And the tax issue is one of the most important risks for the development of Ukrainian lobbying today.

The state has already said that lobbying should be transparent. But the state has not yet said clearly enough: how exactly a lobbyist should tax his income, in what organizational and legal form he should work, which KVED to use, whether he can be an individual entrepreneur or apply the simplified taxation system, how to account for compensation for actual expenses, and whether the mere fact of entering the Transparency Register automatically creates tax consequences.

And here it is important not to make a classic mistake: not to turn the new transparent institution into another zone of excessive regulatory fear.

Lobbyists should not become hostage to tax uncertainty

Lobbying by its legal nature is a professional service activity. The Law of Ukraine “On Lobbying” expressly provides for an agreement on the provision of lobbying services, remuneration of the lobbying entity and the possibility of reimbursement of actual expenses necessary for the execution of the agreement. In other words, the legislator has already recognized that lobbyists can work professionally, for a fee, on a contractual basis and within a transparent model.

At the same time, the Tax Code of Ukraine currently does not contain a special section or separate rules that would regulate the taxation of income from lobbying activities. This means that such income should be subject to general rules, depending on whether the income is received by an individual, an individual entrepreneur or a legal entity.

At first glance, this is a normal situation. Not every new type of activity requires a separate tax regime. But in the case of lobbying, the problem is not that there is no special tax. The problem is that there is no officially formulated, unified and secure tax position of the state on basic issues.

Can a lobbyist work as a sole proprietor? Can he be a single tax payer? Is KVED 70.21 “Activities in the field of public relations” sufficient? Is compensation for actual expenses included in the income of a single tax payer? Does an individual have to register as an entrepreneur just because of the fact of being included in the Transparency Register? Can a one-time action related to lobbying be taxed as ordinary income of an individual?

These are not technical details. This is a matter of entering the profession. And entering the profession should not look like a tax quest with a bad interface and an unexpected fine at the end.

As it is now: general rules without a special tax regime

As of today, lobbying activities do not have a separate tax status. The Law of Ukraine “On Lobbying” defines the legal framework for lobbying, the status of a lobbying entity, the Transparency Register, lobbying methods, lobbying agreement, reporting and restrictions. However, it does not establish a separate model for taxation of lobbyists’ income.

Therefore, several basic models are possible.

The first model is to operate through a legal entity. This can be a company or other legal entity of private law that acquires the status of a lobbying entity and carries out the relevant activities under contracts. In this case, the income is taxed according to the rules applicable to the respective legal entity: income tax or, if there are grounds, the simplified taxation system.

The second model is the activity of an individual entrepreneur. It is the most practical for an individual lobbyist, consultant, expert or specialist who provides services on their own. If the activity is carried out systematically, under contracts, for the purpose of generating income, it has signs of entrepreneurial activity. In such a situation, the individual entrepreneur model is logical and legal.

The third model is the receipt of income by an individual without registering as a sole proprietor in the case of a one-time, unsystematic action. This model should not be automatically excluded either. The fact of one-time income does not always mean systematic business activity. If a person does not lobby on a regular basis, does not promote himself or herself on the market as a permanent provider of such services, and does not enter into contracts on a regular basis, the income may be considered within the general rules of personal income taxation.

The key point is that the mere fact of being included in the Transparency Register should not automatically equate to the actual receipt of income or the obligation to register as a sole proprietor. The Transparency Register confirms the status of a lobbying entity. However, tax consequences should arise not from the formal status as such, but from the actual performance of taxable activities and receipt of income.

Otherwise, the state will actually create a paradox: a person has not yet earned a single hryvnia from lobbying, but has already fallen into the zone of tax uncertainty. This is the wrong signal for the new market.

Simplified system: why lobbyists should not be artificially pushed out of it

The most sensitive issue is whether a lobbyist can be a single tax payer.

Currently, the Tax Code of Ukraine does not contain a direct prohibition on lobbying activities under the simplified taxation system. Paragraph 291.5 of the Tax Code sets out a list of activities and categories of persons who cannot be single tax payers of the first through third groups. Lobbying is not listed as a separate prohibited activity.

This is of fundamental importance. In tax law, restrictions must be clear. If the legislator wants to prohibit a certain type of activity for the simplified system, it must explicitly provide for it. The prohibition cannot arise from an assumption, a precaution or a subjective attitude to the word “lobbying”.

Lobbying itself is not financial intermediation, gambling, production of excisable goods, mining, or any other type of activity for which the legislator traditionally sets restrictions for the simplified system. This is a professional consulting and communication activity, which by its economic nature is much closer to consulting, public affairs, GR, legal analytics, preparation of position papers, organization of communications and support of interaction with lawmakers.

That is why the basic approach should be as follows: if a lobbyist meets the general requirements for a single tax payer, he should be entitled to apply the simplified taxation system.

For an individual lobbyist, the third group of the single tax is the most realistic. The second group may have limitations due to the range of recipients of services, as it provides services mainly to the population and single tax payers. In the field of lobbying, clients may include legal entities under the general system, large companies, business associations, associations, and foreign entities through appropriate legal structures. Therefore, the third group looks more universal and secure.

However, the main thing is not to automatically “drive” all lobbyists into the third group. The main thing is not to create an artificial ban where there is none in the law.

KVED 70.21: a temporary but logical answer

There is currently no separate KVED for lobbying activities. This also creates practical uncertainty for those who want to register their activities correctly, and not “just about.”

The most logical approach today is to use CEA 70.21 “Public relations activities”, since the methodological explanations for this class directly cover consulting services, management and operational support, including lobbying activities to support companies and other organizations in their interaction and public relations.

But here, too, state clarity is needed. If the legislator has created a separate lobbying institution, then the logical next step should be either to officially confirm the possibility of using NACE 70.21 for lobbying activities or to introduce a separate NACE for lobbying.

A separate KVED is not an end in itself. But it can remove unnecessary questions from banks, tax authorities, counterparties, and lobbyists themselves. Because when a profession already exists in the law, but does not have a clear economic classification, the market is forced to live in a state of “legally possible, technically not fully understood.”

This is a poor starting point for a new institute.

The most pressing issue: actual lobbyist’s expenses

There is a separate issue of reimbursement of actual expenses. The Law of Ukraine “On Lobbying” stipulates that lobbying may be carried out for remuneration and/or with payment of actual expenses necessary for its implementation. Under a lobbying agreement, the client may not only pay remuneration but also reimburse expenses related to the execution of the agreement.

And this is where the problem for single tax payers arises. As a general rule, the income of a sole proprietorship paying the single tax is the funds received during the reporting period. This means that the tax logic can follow the simplest path: everything credited to the sole proprietorship’s account is income, including reimbursement of expenses.

But for lobbying activities, this approach may create an excessive tax burden. For example, a lobbyist organizes an event, prepares a communication campaign, orders analytics, pays for travel, translations, technical services, expert materials, venue rental, or other expenses that are directly necessary for the performance of the contract. If the client reimburses these expenses, and the entire amount is automatically considered the lobbyist’s income, then the lobbyist actually pays tax not only on his remuneration but also on transit amounts.

This is not a disaster for a large company. But for an individual lobbyist or a small professional team, it can be a serious barrier.

That is why the state should consider a special rule: for the purposes of lobbying taxation, it is necessary to clearly distinguish between the lobbyist’s remuneration and documented compensation for actual expenses incurred in the interests of the client or beneficiary under the lobbying agreement.

The ideal model is to tax the lobbyist’s remuneration as income, not all transit funds, if the expenses are supported by a contract, primary documents and reports. This is not a benefit. This is a normal logic of taxation of professional intermediary and service activities, where the client’s money is not always an economic benefit for the contractor.

If the state is not ready for such a special rule right away, the minimum should be an official tax consultation or a generalized explanation from the State Tax Service that will provide lobbyists with a clear model for contractualizing such expenses.

How it should be: not special privileges, but a reasonable tax architecture

A proper model of lobbyist taxation should not be based on the idea of privileges. Lobbyists should not be a “special caste” in tax law. But they also should not be victims of legal uncertainty.

An optimal model should be based on several principles.

The first principle is neutrality. Lobbying activities should not be taxed more heavily simply because of the political or reputational sensitivity of the word “lobbying” itself. If it is a legal professional activity, it should be taxed as a legal professional activity.

The second principle is accessibility of entry into the profession. Tax rules should not create an excessive barrier for professionals who want to work transparently. If a person is ready to register, report, conclude contracts, show the client, beneficiary and subject of lobbying, the state should not respond with an additional tax maze.

The third principle is legal certainty. A lobbyist must understand in advance what form of work to choose, how to tax income, what expenses to include in the database, what documents to keep, what risks arise from one-time activities and what risks arise from systematic activities.

The fourth principle is the absence of a double burden on actual expenses. If the money is not an economic benefit to the lobbyist, but merely compensates for documented expenses incurred to fulfill the contract, the state should propose a mechanism that does not turn such amounts into artificially inflated taxable income.

The fifth principle is the separation of status from income. Inclusion in the Transparency Register should not automatically create an obligation to pay taxes or register as a sole proprietor. The tax obligation should be linked to the fact of carrying out activities and earning income, not just to the status.

What the state needs to do

The first step is for the State Tax Service to provide clear individual and, preferably, summarizing tax advice on the taxation of lobbying activities. The market should not be piecing together the legal position from the wreckage of individual answers.

The second step is to officially confirm the possibility of using KVED 70.21 for lobbying activities until a separate KVED is introduced or to directly provide for a separate code for lobbying.

The third step is to confirm that lobbying activities are not prohibited under the simplified taxation system if the entity meets the general requirements of the Tax Code of Ukraine.

The fourth step is to develop a special rule on reimbursement of actual expenses under a lobbying contract. Such a rule should allow for the exclusion from taxable income of documented amounts that are not remuneration to the lobbyist, but only reimbursement of expenses incurred to fulfill the contract.

The fifth step is to distinguish between one-time activities of an individual and systematic entrepreneurial activities. Not every one-time action should automatically create a sole proprietorship obligation. But the systematic provision of services under contracts for profit must be carried out in the appropriate registered form.

The sixth step is to prepare standard tax guidelines for lobbying agreements: how to formulate remuneration, how to reflect actual expenses, what primary documents to prepare, how to prepare a report on the execution of the agreement, how to avoid mixing your own remuneration and client funds.

Why this is important not only for lobbyists

The issue of taxation of lobbyists is not a narrow problem of a particular professional group. It is a question of whether Ukraine will be able to create a civilized market for legal influence on lawmaking.

If the rules are clear, professionals will go transparent. They will register, enter into contracts, submit reports, show clients and lobbying objects. The state, society, and business will gain more transparency.

If the rules are unclear, overly complicated, or tax-disadvantageous, part of the market will simply not come out of the shadows. In this case, the state will have a formal law, but no real culture of transparent lobbying.

You can’t simultaneously demand transparency from the market and punish it for trying to be transparent with an unnecessary burden. It’s like inviting people into a bright room, but putting a turnstile with a tax maze at the entrance.

Conclusion

Ukraine needs lobbying not as a new bureaucratic structure, but as a professional institution of democratic interaction. It is not enough to create a Transparency Register. It is necessary to ensure that the legal work of a lobbyist is tax compliant, economically feasible and procedurally safe.

The main task today is not to invent special privileges for lobbyists. The main thing is not to create unnecessary barriers for them. Lobbyists have to pay taxes. But he should not pay a tax for the state’s uncertainty.

The correct model is a sole proprietorship or a legal entity under the general rules, the possibility of applying the simplified system in the absence of a direct prohibition, official confirmation of KVED 70.21 or the creation of a separate KVED, a clear separation of remuneration and actual expenses, and no automatic tax consequences only through entry in the Transparency Register.

If the government wants lobbying to become transparent, it should make transparent not only the rules of influence but also the rules of taxation.

Because transparency is not born where people are afraid to assign the correct KVED. It is born where the law, tax logic and common sense finally work in the same office.

Pavlo Hez
Head of the UNLA branch in Dnipropetrovs’k oblast