How to start an IT business in Ukraine
Ukraine has strengthened its position in the ratings of publications such as ‘Doing Business’ and similar publications from year to year. The signing of the Ukraine – EU Association Agreement in 2014 led to several amendments to corporate, tax laws, and currency regulations easing being implemented over past years with many more to come soon.
However, despite these changes, foreign IT entrepreneurs and investors are still suspicious when it comes to Ukrainian jurisdiction. Ukraine cannot yet boast the status of being a tech, tax, or corporate heaven for the world’s biggest IT businesses, and there are no facilities for a foreigner to either register a company or to certify a power of attorney online. However, many countries that hold high positions in various business ratings do not have as many innovative instruments that enable a foreign entrepreneur to feel at home. We believe that Ukrainian jurisdiction is substantially undervalued and can offer various opportunities for companies to grow. Given the fact that there are a vast number of high-class IT specialists working in the Ukrainian market, it is a perfect time to start up a business in this country.
Choosing a business model for your company
The most common business models, which are used by either domestic or foreign entrepreneurs in Ukraine, are a Limited liability Company (LLC) or a Joint-stock Company (JSC). There are also other potential models, such as private enterprises or additional liability companies, but they are relatively uncommon.
If your company is registered in your home country, you will be able to set up a representative office in Ukraine, although this will not be considered as a separate entity and will, therefore, have no corporate status in Ukraine. International companies often register wholly-owned subsidiaries as LLCs.
Research shows that the most popular business model in Ukraine is LLC, being chosen by most of the IT businesses. This is, for the most part, due to the new rights and flexible business models available since the introduction of new legislation regarding LLC’s. We will outline why this business model is worth incorporating in your business.
Limited Liability Company
A limited liability company in Ukraine is an entity that has its share capital divided in the form of participation interest. Liabilities of its founders are limited to the contributions made to the share capital by each founder. As there is no minimum share capital requirement applicable to such entities, share capital, maybe even less than 1$. Share capital can be issued as a non-cash consideration but must be formally valued by the owners of the company. It is also required to have a legal address in Ukraine. There are no restrictions for foreign persons owning LLC equity, and both individuals and entities can be founders of an LLC. At least one founder must register the company, but there are no limitations on the maximum number of founders. Due to the implementation of recent legislation, it is now possible for owners of an LLC to enter into a corporate agreement (the equivalent of a Shareholders Agreement). Such a document is confidential and signed only by the owners of the Company. This contract can assist with regulating corporate relations between founders such as duties and rights, etc. There are no strict requirements for this form, making managing companies in Ukraine easier and more flexible.
One of the downsides of this legislation is that a foreigner must obtain a work permit to become a director in Ukraine, meaning that someone without this permit cannot be cited as a director in the registration process. A company may request special authorities to issue such a permit, but only after registration and bearing in mind there is no concept of nominal directors, local law firms may provide director appointing services which can then be changed after a work permit is obtained.
Assuming all necessary documents are ready, it takes around 3 to 4 days to register an LLC in Ukraine. If you are a foreigner and want to establish an LLC in Ukraine, you must obtain a local tax ID number. This process is not as complicated as it might seem, but it will take some time (around five working days). The following documents must be filed to tax authorities:
– An application with information regarding the founder, including its place and date of birth, citizenship, place of work and contact details, etc.
– Passport or any other government-issued ID to identify the founder.
– A notary certified translation of Passport into Ukrainian with a copy.
It is strongly recommended that all the procedures mentioned above are carried out using the services of local law firms. You will only need to issue a power of attorney that will allow the representative to receive your tax ID as soon as possible. If the founder of the Ukrainian LLC is a foreign legal entity, then tax ID is not applicable.
Frequently asked questions: whether it’s easier to register an LLC in Ukraine – by an individual or by an entity. Of course, it is easier when you are setting up as an individual since only a tax ID must be obtained. In the case of a foreign entity, more documents and procedures are necessary, including a notarized copy of the company’s charter and a certificate of incorporation. These documents must be legalized in the country of issue and apostilled if there is no convention between Ukraine and such a state.
Primary documents that must be prepared before LLC registration are as follows:
– Minutes of the founding meeting.
– Registration application (Type of activities for IT companies by the Ukrainian classification of economic activities are: computer programming – code 62.01; computerization consulting – code 62.02; other activity in the sphere of informational technologies and computer systems – code 62.09).
Minutes of the founding meeting and a Charter must be signed and notarized. The name of an LLC must be in Ukrainian with optional translation into other languages, starting with the words – «Товариство з обмеженою відповідальністю» (eng. “limited liability company”).
Generally, a two-tier corporate structure is applied in Ukrainian LLC’s. The general meeting of participants is the highest management body in the corporate structure. The executive body can be the sole director or a board of directors. As an additional body, it is now possible to form a supervisory board. This body performs monitoring functions.
Also, under the new laws, it is not mandatory to pay a salary for the director (only if such an option is mentioned in the charter).
Domestic laws regarding employment apply to local and foreign employees working in Ukraine. To work officially in the Ukrainian company, a foreigner must first obtain a work permit. Permits are issued for one year and can be renewed for a longer-term visa upon necessary approval. Legally a Ukrainian company must pay at least ten minimum salaries based in Ukraine, which represents 41 730 hryvnias a month (1 682 $ as of October 2019). Fortunately, there is an exception for foreign IT specialists who will have no requirement to pay the ten minimum salaries. However, their qualifications first are approved by providing proof of a proper academic certificate and appropriate work experience. Official employment means paying taxes for each employee based on their salaries. Concerning payroll taxes, employees’ salaries are subject to the following charges: income tax – 18%, military levy – 1.5%, and single social payment – 22%. As for single social payment, if an employee has a salary which is more than 15 minimum salaries 62 595 hryvnias (2523 $ as of November 2019), it would be a maximum tax base for the single social payment. Thus, it cannot be higher than 13 770 hryvnias (555 $ as of November 2019).
Another option for Ukrainian IT companies is to attract private entrepreneurs who are an enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. Such entrepreneurs must be officially registered. The private entrepreneur can then provide services to the LLC as an independent contractor (freelancer), so there will not be any official employment between an LLC and a private entrepreneur. Thus, the LLC will not be obliged to pay taxes for employment, making it a desirable prospect for many IT businesses. It does, however, carry the risk of receiving a penalty from the government, who often run inspections to search for companies that are using these services to save on taxes rather than hiring official employees. Such fines can reach up to 10,000 $. For this reason, we recommend consulting with local lawyers regarding any potential cooperation with private entrepreneurs.
Registering and running an LLC in Ukraine is not that different from other countries. The most complicated aspect being the procedure of obtaining the necessary permits and registering the company, which is rendered more difficult for a foreigner due to having to prepare all documentation in the Ukrainian language. It is, however, not as complicated and expensive as registering a business in a country like Singapore (No.2 in “Doing Business 2019”), where you must work with a local agent company to register your business.
Since Ukraine is a developing economy, starting a business here at an early stage may bring outstanding returns for beginning entrepreneurs.