How to start working in Ukraine: case-study for a foreign IT company
Let’s discover the key approaches:
The first option: good for larger companies, e.g., Oracle or Samsung, as they usually open and conduct their activities through a representative office (commercial) in Ukraine.
This option has several disadvantages:
- such a representative office is not an independent legal entity, with no capacity to enter into relations on its behalf, always acting as a proxy for the foreign company. In contracts, the foreign parent company is always indicated by the party. Therefore, the responsibility is always borne by the main company and not by the representative office in Ukraine;
- difficulties in opening an account with the Bank of Ukraine and making payments on behalf of the representative office. Be prepared for constant information requests from the bank about the structure of the company, its owners, and some other information. In addition, the representative office will not be able to buy, sell currency from its account to pay for goods/ works/ services to non-residents or pay royalties;
- inability to choose a simplified taxation system;
- inability to sell a representative office to another person;
- inability to open an additional legal entity, branch, and representative office.
But also, there are some advantages:
- foreigners do not need to get a work permit – service cards are issued;
- a license agreement is not required for the legitimate use of a brand or trademark of a foreign company in Ukraine;
- the repatriation tax is not withheld when transferring the income of its parent company.
The second option, in greater detail: Working through private entrepreneurs is the most popular and least expensive in terms of finances.
A private entrepreneur is a form of entrepreneurial activity without the organization of a legal entity. The most popular is the simplified form – a unified tax, group 3 without the VAT.
- Working under this model, an entrepreneur pays 5% income deductible and a social contribution installment in the fixed equivalent of UAH 1,430 per month (22% off the minimum wages base UAH 6,500, subject to legislative indexation). Any adult individual in Ukraine can become an entrepreneur and opt for this type of taxation regimen.
- Therefore, there is no need to create a legal entity at an early stage and recruit a large staff; you can try to work through entrepreneurs.
- Such an IT model of work has been modus operandi in Ukraine over the latter decade and has not instigated any suspicions from tax authorities/ banks for quite a long time.
- The most important thing with this work model boils down to properly drawn-up contracts that will protect you from unwarranted inspections by regulatory authorities.
- Every entrepreneur opens their bank account and is ready to make a profit directly in any currency. The obligation to pay taxes in Ukraine falls back on such an entrepreneur; therefore, you draw no additional commitments to bear as per taxes or anything other legal overheads by sending funds to such an entrepreneur.
- If your company is not connected with gambling or other suspicious activity for the bank, then payment to the entrepreneur’s account is processed within 1-2 business days, contingent upon the entrepreneur’s previous contract and invoice submittal to the client bank.
- In addition, banks offer their special services to minimize the cost of distributing payments to each entrepreneur.
However, further information is made available during a private consultation.
The third option: at the time of writing, this article is not yet available, but it is presumed to take effect from the next year (the law has not yet been finally adopted).
Such a system is called “Diia-city.” In short, this is a symbiosis of workmanship of an IT specialist, as a hired employee and that of an entrepreneur, with simplified taxation: entrepreneur overheads accounted for as 5% + 1430 UAH per month, BUT an additional 1.5% of the military fee added on top.
- In addition to that, a number of advantages are offered for legal entities, residents of Diia-City, as per income tax – it will be possible to use the tax on withdrawn capital if you re-invest the generated profit in the development of your business: in such an event, you will forebear to pay the income tax (18%).
- But for the membership in Diia-city, it is necessary to meet the criteria of a Diia-city member: an exceptional IT activity of such a company, starting from 9 employees on staff, with an average income of at least 1200 EUR per capita.
- In addition, every year, you will need to undergo an audit to confirm the status of a resident of Dia City; according to some experts, such an audit can range from USD 1k to 100k (depending on the company’s size and its turnover).
There are still many questions about the third option, but it will definitely be available soon.
I hope this material was helpful for you. If you have any questions or plan to open your office in Ukraine, I will be glad to help.
Leonid Viktorov, Certified lawyer, Director of «Adviser» PE