Ukraine on the path to the EU: how tax alignment becomes an engine of growth

Ukraine’s path to the European Union is often described in terms of reforms, legislation, and alignment with the acquis. But behind these formal steps lies a deeper transformation — one that directly affects how the economy functions and how businesses operate.

Taxation is at the centre of this process.

And while Ukraine is moving forward under extraordinary circumstances, the experience of countries like Lithuania shows what this transformation can bring in practice.

More than aid. How EU integration changes the economy

Thirty years ago, Lithuania stood not in war, thankfully, but in the uncertain grey zone of post-Soviet transition. We had a broken economy and a tax system that was more “wild west” than “modern west.” Today, I want to share the concrete, tangible benefits that EU membership has brought to our budget, our GDP, and our businesses.

When Lithuania joined the EU in 2004, its GDP per capita was around 50% of the EU average. Today, it is approaching 90%.

IMF research on previous enlargements finds that new EU members tend to gain about ~30 % in GDP per capita within ~15 years of accession, driven by productivity and investment increases linked to Single Market integration.

This did not happen by accident. It is the result of what we call the “Single Market Multiplier.”

While the receipt of structural funds was significant, the true engine of our economic expansion was market access, not just aid. The real growth stemmed from the ability of Lithuanian manufacturers to sell directly to markets in Berlin, Paris, or Rome without facing a single tariff or customs delay.

Furthermore, EU membership provided immediate fiscal credibility. The moment we joined, the risk premium on our sovereign debt dropped, allowing the state to borrow at significantly lower rates. For the Ministry of Finance, this reduction in debt servicing costs was transformative, freeing up millions in the national budget to invest in essential infrastructure like schools, hospitals, and roads.

At the same time, the quality of EU funding mattered as much as the quantity. And the question is never merely about how much money flows in, but about the true value it carries. Cohesion Fund instruments have become our tools for weaving long-term economic resilience. Beyond the immediate gains, they have breathed new life into our energy grid—a lifeline that shields us from the shadows of Russian energy coercion.

Fiscal discipline is the difficult but necessary part

EU membership is not only about opportunities — it also comes with strict fiscal rules.

For Lithuania, this initially felt like a constraint. Requirements on deficits and debt limited flexibility and required difficult decisions. But over time, this discipline proved essential.

It forced more responsible budgeting, reduced vulnerabilities, and helped build a tax system capable of withstanding crises. The benefits became clear during the 2008 financial crisis and later during the COVID-19 pandemic, when fiscal discipline allowed for a more stable response.

Lithuania’s tax system has strengthened significantly since joining the EU, reflecting a more structured and efficient fiscal framework. Total tax revenues rose steadily, reaching approximately 32.8 % of GDP in 2021, up from lower levels prior to accession. Income tax collection, in particular, grew markedly, with personal income tax (PIT) as a share of GDP moving closer to EU averages, highlighting improved compliance and the formalisation of the economy.

For us fiscal rules meant not just restrictions — those were a foundation for resilience.

Taxation as the “hidden engine” of the Single Market

When discussing the EU Single Market, the focus is usually on trade — free movement of goods without tariffs or border delays.

The one of the ‘hidden’ engines of the Single Market is the taxation architecture that underpins our growth. Because the Single Market isn’t just a trade agreement – it is a sophisticated ecosystem designed to protect your capital and accelerate your cash flow.

Union applies Non-Discrimination Principle: EU law forbids any country from treating another Member State’s business worse than a local business. If a country offers certain incentives or simplifications to local companies, they must typically offer it to other EU companies too.

This means that the EU tax framework creates an environment in which businesses can operate across borders efficiently. This is complemented by the harmonisation of VAT and excise rules, which simplifies cross-border transactions and reduces administrative barriers. At the same time, rules in the area of direct taxation play a dual role: they protect businesses from double taxation while also limiting the artificial shifting of profits. This architecture is not just technical. It protects capital and improves cash flow — two factors that directly influence business decisions.

For Lithuania, aligning with these rules reduced administrative burdens, improved tax collection, and strengthened competitiveness.

EU integration also required a fundamental change in how tax authorities operate. The traditional model — focused on control and enforcement — had to evolve. In a system where capital is mobile, overly complex or unpredictable taxation simply pushes business elsewhere.

Lithuania moved towards a more service-oriented approach, supported by digitalisation and risk-based controls. This shift was not optional — it was a condition for remaining competitive within the Single Market.

What this means for Ukraine

Ukraine is now going through a similar transformation, but under much more difficult conditions.

And I think for Ukraine, these examples are more than facts—they are a roadmap. They show how aligning tax systems with EU standards can transform not just revenue collection, but the very structure of the economy. By improving compliance, formalising business activity, and reducing the shadow economy, Ukraine can create a transparent fiscal environment that encourages investment, strengthens public finances, and fuels sustainable growth. The path of harmonization—adopting EU tax directives, transparency standards, and fiscal rules—is exhausting. I know. But it transforms your budget from a black box into a transparent engine of growth.

These steps may appear technical, but their impact is systemic.

For Ukraine, this transformation is already underway. And despite the challenges, it creates a clear perspective: a tax system that is not only aligned with EU rules, but capable of driving growth within the European economic space.