Ukraine faces risk of tougher EU loan terms to get aid payouts – EU 90-billion-euro loan for Kyiv is on hold

The European Union is considering imposing stricter conditions on its €90 billion ($105 billion) loan to Ukraine, making some of the payouts dependent on the introduction of an unpopular tax change for businesses, according to people familiar with the matter, Bloomberg reports.

The plan being discussed by the European Commission, the EU’s executive arm, would affect €8.4 billion in so-called macro-financial assistance expected to be granted this year.

The push coincides with Ukraine’s efforts to persuade its other major donor, the International Monetary Fund, to at least delay imposing the same requirement to unlock more aid under a separate loan program worth more than $8 billion, the people said. They asked to remain anonymous because the talks are private.

The discussion has zoomed in on changes to a preferential tax regime currently applying to some Ukrainian companies. Initially designed for self-employed entrepreneurs and small businesses, it allows firms to pay a minimum rate of 5% of revenue. The change would add more than 40 billion hryvnia ($907 million) annually to the budget, according to the Finance Ministry’s estimates.

The Finance Ministry and Ukraine’s major donors have argued that the arrangement is a drain on the wartime budget, distorts competition and helps maintain a large shadow economy.

The proposal would require the authorities in Kyiv to impose a 20% value-added tax on those companies currently operating under the preferential system, whose annual revenue exceeds 4 million hryvnia, the people said.

The EU aid potentially affected by the new condition accounts for just a fraction of the entire two-year package, which is made up of about €60 billion in defense support with the rest split between macro-financial assistance and the so-called Ukraine Facility package, which provides funds for general budget spending.

The European Commission spokepersons said the commission was “working tirelessly” to finalize the memorandum of understanding that would underpin the conditions for the funding for Ukraine, but declined to provide details.

But the push is likely to raise tensions inside the Ukrainian society as the proposed measures are extremely unpopular. A standoff between parliament and Zelenskiy is also making them difficult to implement.

Parliament openly defied Zelenskiy earlier this year in refusing to change the tax arrangement including expanding the categories of foreign parcels subject to VAT, another of the requirements being pushed by the IMF. The president’s office, meanwhile, blamed the Finance Ministry for being too pliant toward the IMF.

The IMF is still insisting, however, that parliament passes VAT tightening on parcels by June, they said. The Finance Ministry said it would soon submit the relevant bill to parliament. Still, the prospects for the amendments to pass are looking slim, one of the people said.

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