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Business in Ukraine

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On this page the potential investors are welcomed with the basic concepts of doing business and taxation in Ukraine.

The two main forms of doing business in Ukraine are:

– registration of an independent subsidiary;

– registration of the foreign company representative office (which is not given the status of independent legal entity).

 

Main features and contrasts

Characteristic

Subsidiary company

Representative office

Registration authority

Local state registration office

Ministry of Economic Development and Trade of Ukraine (MEDTU)

Duration of establishment

2-3 days

approx. 1 month

Official fee for establishment

Insignificant

USD 2500

Rights of a separate legal entity

Yes

No

Acting on behalf

on its own behalf

on behalf of the principal

Opportunity of distribution of shares between several parties (founders)

Yes

No

Opportunity to obtain the Ukrainian permissions and licenses for different kinds of activity

Yes

No

Opportunity of employment of foreign citizens

Yes, subject to receipt of special permission for each foreign employee

Yes, subject to special registration by MEDTU for each foreign employee

Variants of tax regimes

General tax regime or simplified taxation system

Only general tax regime

 

The large majority of foreign investors focusing on long-term business prefer to organize their activities in Ukraine in the form of subsidiary company as more understandable, regulated and effective model in practice.

Nevertheless, there are examples of successful business in the form of a representative office. Although a business through a representative office is associated with a number of legislative conflicts, difficulties in obtaining permits, less flexible tax regime, such model might become relevant for short-term projects focused on the quick execution of works, as it allows immediate payment to the non-resident in foreign currency.

2. The ways of making foreign investments

The actual ways of making foreign investments are the following:

  • Incorporation of the company and contribution to its charter capital by means of money or property or law of property

  • Granting loans from non-resident (both founder or any other non-resident)

  • Granting the right to use property rights owned by a non-resident (for example, right to use the trademark)

3. The ways of “return” of profit from foreign investments

The basic legal ways of “moving” income of the Ukrainian companies (subsidiary companies) abroad, which can be applied both collectively and discretely are:

  • Dividends*

* the profit of the subsidiary company is paid in a form of dividends in favor of its members proportionally to their shares in charter capital.

When planning business in Ukraine it is important to consider that sometimes Ukraine provides for moratorium on payment of dividends abroad, or restricts the amounts of dividends.

  • Loan repayment from the non-resident, interest payment under it**

** Appears a natural consequence of the loan provided by the non-resident.

  • Royalty***

*** Is payment for the trademark or other intellectual property owned by a foreign company and provided to the subsidiary company.

At the moment of payment in favor of mother company the subsidiary is entitled to pay the repatriation tax in amount according to relevant agreement on avoidance of double taxations. If the State of the investor has no valid agreement with Ukraine, the common tax rate of 15% should apply for the most types of income.

4. Currency control

Ukraine has a system of currency regulation, providing for restrictions and prohibitions on the use of currency as a mean of settlement.

The basic currency approached are as follows:

  • The circulation of foreign currency is not free in Ukraine. Only hryvnia – the national currency – is unconditional mean of settlements. The use of currency is strictly regulated.

  • Ukrainian enterprises (including subsidiary companies) are unable to repay foreign currency loans earlier than the date stipulated in the contract. This applies to both the loan and interest thereon.

Sometimes there are certain restrictions on purchase of foreign currency for repayment of dividends to a foreign investor.

This prohibition does not apply to the payment of dividends for 2014-2016 within USD 5 000 000 per month.

  • Part of the company’s foreign earnings (50%) are subject to sale on the exchange market of Ukraine

  • There are certain restrictions for the amounts of foreign currency to be purchased in order to return abroad funds received by foreign investors from the sale of securities, corporate rights, as a result of a decrease in the authorized capital or withdrawal of the legal entity

Note that the above list of currency restrictions is not exhaustive. But we listed the most significant.

5. Tax regimes

The description of available tax regime is given in the context of subsidiary companies and representative offices.

Taxation of companies registered in Ukraine

The limited liability companies, joint-stock companies, private enterprises and other independent subsidiaries are entitled to the widest scale of tax regimes.

There are two main regimes: general taxation mode and simplified taxation system. Each of them, meanwhile, has internal diversity.

I. General tax regime includes the following main taxes:

1.1. Corporate income tax (CIT) with a common rate of 18% of the profit, which is calculated according to the accounting rules, to put it simply, by reducing the company’s total income for its reasonable and confirmed expenses.

1.2. Value-added tax (VAT) at the rate 20 % which is applied to:

1) supply of goods and services on the customs territory of Ukraine

2) import of goods

3) international carriage of passenger and luggage.

If the amount of these operations exceeds 1,000,000 hryvnia (approximately 35,000 USD) per year, then the company is required to get a VAT registration, and, consequently, to administrate and pay this tax. When paying VAT to the budget, the company receives a tax credit – a sort of “negative value” of VAT obligation, which allows to reduce the amount of tax payable to budget. Such rules of tax administration ensure the taxation of only the added value of the goods, works or services, and not their full value.

1.3. Social security charge – this tax is aiming at accumulation of pension funds and social insurance funds for the population of Ukraine and constitutes 22% of each employee’s wage (including premiums).

Other taxes are also paid in Ukraine; however, they have a specific nature and apply to certain types of economic activity.

1.4. Tax agency of the employees

Apart from paying taxes at their own expense, each company in Ukraine acts as a tax agent for its employees. This means that the company in obliged to withheld from the employee’s wages and pay to the budget taxes arising for such employees, namely, personal income tax and military tax, which totally constitute 19.5% of salary. The employers pay these at the expense of employees and instead of them and also bear the responsibility for these taxes.

II. Simplified taxation system is applied in order to support small and average business and allows 4 groups of regimes:

I group

II group

III group

IV group

Taxpayer

private entrepreneur

private entrepreneur

private entrepreneur/legal entity

agricultural producers

Number of employees

0

up to 10

no restrictions

no restrictions

Max. profit per one calendar year

UAH 300,000 (approx. USD

10,500)

UAH 1.5 million (approx. USD

57,000)

UAH 5 million (approx. USD 177,000)

Single (flat) tax rate

up to 10% of safety net (approx. UAH 180 UAH or USD 7)

up to 20% of minimal salary (approx. UAH 750 or USD 27)

3% of income (upon condition of separate registration and payment of VAT) or 5% of income (VAT included)

The tax rate depends on the category of land, its location and quantity

In addition to the single tax, an entrepreneur (or a company) applying the simplified tax system shall pay a social security charge “for himself” (no less than UAH 820 or USD 30 per month), and also for each of his employees in the amount of 22% of their wages.

* It is important to note: Tax Code of Ukraine sets out a number of restrictions on application of the simplified tax regime for certain types of activities, as well as for some companies; the purpose of such restrictions is to ensure social and economic justice and to prevent the abuse of the simplified tax regime for actual tax evasion.

For example, a company owned for more than 25% by a legal entity, which applies a general tax regime, cannot apply a simplified tax regime.

Taxation of the representative office of a foreign company

The Ukrainian representative office of a foreign company is considered a separate taxpayer (although it does not have the status of an independent legal entity). And is, therefore, obliged to keep records of all its operations in Ukraine, by analogy with a subsidiary, and to pay income tax out of profits earned in Ukraine, as well as VAT (if it performs taxable transactions for more than UAH 1,000,000 or USD 35,000 a year).

At the same time, there are two approaches for the calculation of representative office profits: if the investor does not separate the income received by the representative office from the income received abroad, then the amount of taxable income in Ukraine is determined on the basis of a special balance that must be agreed with the tax authority of Ukraine. If, however, it is impossible to determine the profit of a representative office by direct calculation, then the profit is calculated according to formula: all income received minus all income received multiplied by 0.7.

6. Licenses and permissions

Almost any business in Ukraine (except the smallest) requires a certain package of permits.

Currently Ukraine issues more than 150 different types of permits and conclusions that are required from a company depending on the nature of its business activities.

The most popular permits are:

– permission for the construction and reconstruction by the inspection of architectural and construction control;

– permission for dangerous works;

– permission to operate the dangerous equipment;

– permission for outdoor advertising;

– permission to operate a radio frequency resource or radiating device;

– permission for special use of resources (water, natural);

– permission to release pollutants into the atmosphere;

– various conclusions of the sanitary-epidemiological authorities and the veterinary authorities regarding raw materials, technologies, equipment and products;

– various certificates of conformity or recognition;

– assessment of the environmental impact of economic activity.

Several dozen businesses, in addition to permits, must possess licenses. These are, among others:

– financial services (including insurance);

– banking;

– cargo, passenger and baggage transportation;

– business activities in telecommunications, TV and radio broadcasting;

– manufacturing and sale of ethanol, cognac and fruit spirits, alcohol overages and tobacco;

– construction activity (for complex objects);

– production, import and sale of pharmaceuticals.