Business in Ukraine
In this section we offer to potential investors some information regarding the basics of doing business and its taxation in Ukraine.
Primary forms of doing business in Ukraine are:
– registration of a Ukrainian company. Generic Limited Liability Company form of incorporation is available, although more specialized forms may also be designed;
– registration (establishment) 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 for Economic Development, Trade and Agriculture|
|Establishment period||2-3 working 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||Limited|
|Employment opportunity for foreigners||Work permit is required||Requires special registration by the Ministry for Economic Development, Trade and Agriculture|
The vast majority of foreign investors focused on long-term business structure their activities in Ukraine by establishing a local company as a more clear-cut 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 provision of relevant services etc., 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 include:
- establishing a local company and making contributions to its charter capital in the form of:
- extending a loan facility to a Ukrainian company;
- transferring property and intellectual rights 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:
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.
In order to protect the local currency, Ukraine may impose restrictions on the payment of dividends abroad, temporarily suspending them or limiting the maximum amount. Therefore, when planning a business currency regulation risks should be taken into account.
Loan principal and interest repayment
This is a logical continuation of financing the Ukrainian company through a loan from the parent company.
The payment by the Ukrainian company to the parent one for the right to use trademarks and/or other intellectual property rights.
When paying to the parent company, the Ukrainian company must withhold 15% as repatriation tax unless a Double Taxation Treaty with the relevant country can be applied.
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 restricted. The only legal means of payment between residents is in local currency (UAH). Any use of foreign currency is strictly regulated;
- various special rules and restrictions on purchasing foreign currency should be expected, and in times of economic turmoil may, for instance, limit the local company’s ability to pay dividends to a foreign investor.
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 taxwith a base rate of 18% of the taxable object, is calculated according to accounting rules (by reducing the total income of the company by its confirmed expenses);
1.2. value added tax (VAT)
There are three types of VAT rates in Ukraine:
1) 20% (accrued, not withheld) – applied for:
– sales of goods and services on the territory of Ukraine;
– import of goods to Ukraine;
– international transportation of passengers and goods by all types of transport, etc.;
2) 0% – applies to export of goods;
Meanwhile, the President of Ukraine is going to sign the Law that provides for 14% VAT rate, which will be applied to operations for the supply of certain types of agricultural products.
The legislation also provides for transactions that are not subject to VAT (transactions that are exempt from VAT and transactions that are not subject to VAT itself);
1.3.unified social payment – this is a fee (de-facto tax) aimed at forming the pension fund and social insurance funds of Ukraine, in the form of 22% accrual on the salary of each employee (including bonuses).
Other kinds of taxes are also present, however they have more specialized character and are applied to specific kinds of economic activities.
1.4. Tax agency
In addition to paying taxes from its own funds, each company acts as a tax agent in relation to its employees (and any other individuals it makes payments to, unless they’re registered as individual entrepreneurs).
This means that the company is responsible for withholding/accruing and paying the relevant taxes for the individual.
In particular, wages are subject to two taxes – Personal Income Tax (PIT) and the military levy, which together constitute 19.5% of wages, as well as the unified social payment in the amount of 22%.
II. Simplified taxation system may be chosen by qualifying payers instead of Corporate income tax. It is aimed at supporting small and medium-sized businesses and has the following options:
|Group І||Group II||Group III||Group IV|
|Tax Payer||Private entrepreneur (individual)||Private entrepreneur (individual)||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 UAH (approx. 37 000 USD)||5 million UAH (approx. 185 000 USD)||7 million UAH (approx. 260 000 USD)||–|
|Unified tax rate||up to 10% of the subsistence minimum (approx. 203 UAH or 7,5 USD) per month||up to 20% of the subsistence minimum(approx. 405 UAH or 15 USD) per month||3% of turnover (subject to registration and payment of VAT) or 5% of turnover (no VAT obligations)||fixed tax rate depends on the category, location and area of land plots in use|
In addition to the unified tax, an entrepreneur using the simplified taxation system pays unified social payment “for oneself” (in the amount not less than UAH 1,039 or USD 39 per month).
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 UAH or 37000 USD per year).
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;
– substantial facilities construction;
– medicine manufacture, import, trade.
6.BEPS in Ukraine
Ukraine partially joined the BEPS package (Base erosion and profit shifting – action plan adopted by the Organization for Economic Cooperation and Development).
As a result, starting from 2022 the CFC (“Controlled Foreign Corporations”) rules should be introduced in Ukraine: the profits of a controlled foreign company will be taxable in Ukraine if the person (or legal entity) controlling such a foreign corporation is tax resident in Ukraine.
At the same time, as Ukraine has not signed the relevant MCAA agreement, therefore automatic exchange of financial information (AOEI) does not apply in Ukraine.