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Business in Ukraine

In this section we offer to potential investors some information regarding the basics of doing business and its taxation in Ukraine.

The main two forms of doing business in Ukraine are:

registration of a Ukrainian company;

registration of a Ukrainian representative office of a foreign company (without the status of an independent legal entity).

Main features and differences

Characteristics

Ukrainian company

Representative office

Body of registration

Registrar at company location

Ministry of Economic Development, Trade and Agriculture

Establishment period

2-3 work days

about one month

Rights of an individual legal entity

Yes

No

Taxation

Maximum opportunities to choose an optimal tax system

All representative office transactions are subject to separate tax accounting and taxation in Ukraine

Acting on behalf of

On its own behalf

On behalf of the parent company

Ability to distribute shares (stock) among several partners

Yes

No

Possibility of obtaining permit documentation, licenses for specific types of economic activity

Yes

No (or very limited)

Employment opportunity for foreigners

Work permit is required

Requires special registration by the Ministry of Economic Development, Trade and Agriculture

The vast majority of foreign investors focused on long-term business, organize their activities in Ukraine in the form of a Ukrainian company as a more understandable common model in practice.

However, there are also examples of successful business in the form of representative office. And although business by means of representative office is associated with a number of legal conflicts, difficulties in obtaining permits, inflexible taxation system, this model is often relevant for short-term projects aimed at rapid performance of work or provision of services, as it allows for prompt and direct financing of non-resident’s activity in Ukraine in foreign currency.

1. Investment options

The most popular ways to invest in Ukraine are as follows:

  • creation of a Ukrainian company and making investments into its charter capital in the form of:

  • monetary funds;

  • property;

  • lending to a Ukrainian company;

  • granting of property rights and intellectual property objects to a Ukrainian company.

2. Ways to return the investment

The main ways to direct the income of Ukrainian companies abroad, which can be applied independently and can also be combined, are the following:

Dividends

Ukrainian company pays its owners (participants) the received profit in the form of dividends – in proportion to the share of each owner in the capital of the company.

Sometimes Ukraine imposes restrictions on the payment of dividends abroad, or limits the maximum amount of dividends allowed to be paid. Therefore, when planning a business it is important to consider such probability.

Return to non-resident of loan and interest on it

This is a logical continuation of financing the Ukrainian company through a loan from the parent company.

Royalty

The payment by the Ukrainian company to the parent one for the right to use the trademark and other intellectual property objects.

When paying to the parent company, the Ukrainian company must pay repatriation tax in the amount in accordance with the Convention for the Avoidance of Double Taxation in the relevant state.

If the investor state does not have an agreement with Ukraine, the general repatriation tax rate is 15% for most types of income.

3. Currency control

Ukraine has a currency regulation system which provides for certain restrictions on the use of currency and its use as a means of settlement.

The main currency rules are:

  • foreign currency turnover in Ukraine is not free. The only legal means of payment between residents is hryvnia. The use of foreign currency is strictly regulated;

  • sometimes there are special rules and restrictions on buying currency to pay dividends to a foreign investor.

This list of currency restrictions is not exhaustive, it lists only the main ones.

4. Tax regulations

Let us consider the existing tax regulations in Ukraine in terms of Ukrainian companies and representative offices of non-residents.

Taxation of Ukrainian companies

Companies established in Ukraine have the opportunity to choose one of two tax regimes: the general system and the simplified taxation system.

I. General taxation system includes the following universal taxes:

1.1. corporate income tax with a total rate of 18% of the taxable object, is calculated according to accounting rules (by reducing the total income of the company on its confirmed expenses);

1.2. value added tax (VAT) with a rate of 20% is used for:

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

2) import of goods into Ukraine;

3) international transportation of passengers and goods by all means of transport, etc.

If the sum of the mentioned operations exceeds 1000000 hryvnias (approximately 27 000 dollars) per year, the company should register as a VAT payer, charge and pay this tax.

When paying VAT to the budget, the company receives a tax credit – this is a negative value of the VAT liability by which the amount of the tax liability on the following transactions can be reduced.

This procedure of tax administration makes it possible to actually pay the tax only from the “markup” on the value of goods, works or services, rather than from their full value;

1.3. unified social payment – this is a tax aimed at forming the pension fund and social insurance funds of Ukraine), constitutes 22% of the salary of each employee (including bonuses).

In Ukraine other kinds of taxes are also paid, however they have more special character and are applied to some certain kinds of economic activities.

1.4. Tax agency of employees

In addition to paying taxes from its own funds, each company acts as a tax agent in relation to its employees.

This means that the company’s duties include charging and paying some taxes at the expense of the wages of its employees – that is, conventionally speaking, at their expense and instead of them.

In particular, wages are subject to two taxes – Personal Income Tax (PIT) and the military levy, which together constitute 19.5% of wages. This is the amount of tax that companies are obliged to deduct from the salary of their employees. At the same time, it is the companies that are responsible for non-payment of these taxes, not the employees themselves.

II. Simplified taxation system is applied for the development of small and medium-sized businesses and provides for the following 4 groups of payers:

Group І

Group II

Group III

Group IV

Tax Payer

Private entrepreneur

Private entrepreneur

Private entrepreneur / legal entity (company)

Producers of agricultural products

Amount of employees

0

up to 10

no limitations

for companies – no limitations

Max income per calendar year

1 million hryvnias (approx. 27 000 dollars)

5 million hryvnias (approx. 135 000 dollars)

7 million hryvnias (approx. 189 000 dollars)

Single tax rate (per month)

up to 10% of the minimum of subsistence (approx. 203 hryvnia or 7,5 dollars)

up to 20% of the minimum of subsistence (approx. 405 hryvnias or 15 dollars)

3% of income (subject to registration and payment of VAT) or 5% of income (without registration by the payer and payment of VAT)

tax rate depends on the category, location and area of land

In addition to the single tax, an entrepreneur (or a company) under the simplified taxation system pays a unified social payment “for itself” (in the amount not less than UAH 1,039 or USD 39 per month), as well as for each of its employees in the amount of 22% of their salary.

Important! The Tax Code of Ukraine sets a number of restrictions on the application of simplified taxation system for certain types of activities, as well as for some companies; the purpose of such restrictions is to ensure social and economic justice and prevent the abuse of the simplified taxation system for de facto tax evasion.

Thus, for example, a company, more than 25% of which is owned by a legal entity that uses the general taxation system, cannot take advantage of the simplified taxation system.

Taxation of representative offices

The representative office of a foreign company in Ukraine in the context of taxation is considered as a separate taxpayer (although it does not have the status of a separate legal entity).

Therefore, the representative office is obliged to keep records of all its operations in Ukraine similar to a Ukrainian company and pay tax on profits received in Ukraine, as well as VAT (if performing taxable operations exceeding 1000000 hryvnias or 27000 dollars per year).

5. Licenses and permits

In Ukraine, depending on the nature of business activity, a company may be required to obtain certain permits, the most common of which are the following:

permission from the State Architectural and Construction Inspectorate to perform any substantial construction;

hazardous work permit;

hazardous equipment operating permit;

outdoor advertising authorization;

operating permit for radio electronic equipment and emitting devices;

permission for special use of resources (water, etc.);

air pollution permitting;

various certificates of conformity and conformity recognition certificates;

environmental impact assessment report and others.

In addition to activities that require permits, Ukraine also has a stricter and a more complex licensing procedure for certain types of activities.

About 30 types of activities are subject to licensing, the most common of which are the following:

financial services (including insurance);

banking business;

passenger transportation;

alcoholic beverages and tobacco production and trade;

broadcasting activity;

substantial facilities construction;

medical drug manufacture, import, trade.

6. BEPS in Ukraine

Ukraine partially joined the BEPS (Base erosion and profit shifting – action plan adopted by the Organization for Economic Cooperation and Development).

As a result, starting from 2021 the CFC (“Controlled Foreign Corporations”) rule will be introduced in Ukraine: the profits of a controlled foreign company will be taxed by the country the tax resident of which is the person who controls the company in proportion to his share in such company.

At the same time, as Ukraine has not signed the relevant MCAA agreement, automatic exchange of financial information (AOEI) does not work in Ukraine.