Draft Law No. 14112, “On Amendments to Article 266 of the Tax Code of Ukraine…,” has been submitted to the Verkhovna Rada of Ukraine for consideration; it proposes the introduction of a nationwide property tax exemption. At first glance, the initiative has a clear social purpose: to protect citizens—primarily pensioners and rural residents—from the tax burden associated with owning small non-residential properties.

The explanatory note to the draft appeals to social justice, pointing to the “economic irrationality” of taxing “garages, sheds, workshops, and auxiliary farm buildings,” which, according to the authors, “generate virtually no profit.” The authors propose amending the Tax Code of Ukraine to include a provision granting a tax exemption to individuals for any non-residential real estate up to 100 square meters.

Currently, such an exemption exists only for residential real estate:

• for apartments: the tax base is reduced by 60 square meters;
• for residential houses: by 120 square meters;
• for various types (apartment + house): by 180 square meters.

Owners of garages, sheds, workshops, storage rooms, barns, and other auxiliary structures are not eligible for any exemptions and are required to pay tax on their total area, regardless of whether these structures generate income.

At the same time, the tax on real estate other than land plots is, by its nature as defined in Article 10 of the Tax Code of Ukraine (TCU), a local tax. This means that it is established by decisions of local self-government bodies and is one of the key revenue sources for local budgets, the funds from which are directed toward the needs of the community itself.

The current version of the Tax Code grants local self-government bodies comprehensive authority to set this tax. In particular, subparagraph 266.4.2 of paragraph 266.4 of Article 266 of the TCU explicitly authorizes village, settlement, and city councils “to establish tax exemptions for taxes paid within the respective territory… and additional exemptions.”

The vast majority of communities in Ukraine actively use this tool. Recognizing the social sensitivity of the issue and the lack of economic rationale in taxing farm buildings, local councils are overwhelmingly adopting resolutions that set a zero rate (0%) or a complete exemption for so-called auxiliary (farm) buildings, which include the sheds, barns, storage sheds, and garages mentioned in the explanatory note.

Thus, the “problem” that the bill is intended to solve has already been resolved in most communities by the local governments themselves. Where such a problem still exists, it is not the result of a gap in national legislation, but solely due to inaction or a deliberate fiscal decision by a specific local council that has failed to exercise its lawful authority. Resolving this specific issue by introducing a nationwide mandate constitutes an unjustified interference in the authority of local governments.

One of the greatest dangers of the initiative lies in its lack of specificity. By introducing a nationwide exemption, the bill makes no distinction between properties based on their economic purpose.

The proposed provision of the bill—“(d) for non-residential real estate—100 square meters”—will apply to absolutely all properties owned by individuals. It will apply to everything from an old 70-square-meter shed owned by retirees to a commercial warehouse, a service station, a workshop, or a store with an area of up to 100 square meters that is registered to an individual and serves as a source of regular income.

The result of this approach may be that the main beneficiaries of the tax exemption will not be socially vulnerable segments of the population, but rather owners of small and medium-sized businesses that use commercial real estate registered to individuals.

In addition to a direct reduction in tax revenue, the bill creates legal incentives for new tax evasion schemes. Any tax exemption tied to a quantitative limit (in this case, 100 square meters) inevitably encourages businesses to engage in “tax optimization.”

The owner of a commercial property with an area of, for example, 300 square meters, who currently pays tax on the entire area, will have a legal opportunity to split this property into three separate units of 100 square meters each and register them under the names of three different family members (each of whom is a separate taxpayer). Each of the three owners will take advantage of the 100-square-meter exemption, which will result in the commercial asset being completely removed from taxation. The local budget, which had counted on revenue from 300 square meters, will receive nothing.

This will obviously result in significant losses for local budgets, which is also a key risk.

In summary, it should be noted that Bill No. 14112 is an initiative with a clear social and humanitarian focus, designed to correct an obvious injustice in the tax system.

However, in order for such a bill to be adopted while avoiding a collapse of local finances, it requires a much more detailed financial and economic justification. It is necessary to clearly calculate the amount of funds that communities (especially rural and small-town communities) will lose and, possibly, provide for compensation mechanisms for them from the state budget.

Otherwise, lawmakers risk cutting local revenues, which is extremely dangerous under current conditions.

Overall, it should be noted that the idea is sound, but its implementation requires meticulous calculation and proper formulation.

At the same time, the expert community and international partners have for years been recommending that Ukraine transition to an ad valorem model—that is, taxation based on the market (appraised) value of real estate. This approach is far more equitable and has been adopted as the standard in many European countries.