If you are a foreign investor, a foreign IT company or Ukrainian developers, and you want to establish an IT company in Ukraine, this legal advice will help you deal with the main issues in that direction.
Following forms of IT business are most popular in Ukraine:
- Individual Entrepreneur (FLP in Russian (“ФЛП” in Cyrillic) FOP in Ukrainian (“ФОП” in Cyrillic). It may be any citizen of Ukraine or any foreigner with a permanent residence permit in Ukraine, registered in the register of the Ministry of Justice of Ukraine. They, most frequently, use the simplified taxation system – 5% of total income (+ unified social tax). It may work with foreign companies.
- Limited Liability Company – LLC (“TOV” in Ukrainian (“ТОВ” in Cyrillic), “OOO” in Russian (“OOO” in Cyrillic). This is a legal entity, the founders (members) of which can be both individuals and legal entities. Citizenship also does not matter. LLC shall be run by its director (management), and separate issues shall be solved exclusively by its members. It shall be a payer of
– 5% single tax or
– income tax (18%) and VAT (20%).
Unlike Individual Entrepreneur, LLC (TOV) shall pay a salary to its director and other employees (including, at the same time, the payment of personal income tax, social security levy, and military levy).
- A permanent establishment of a foreign company is used in extreme cases. The taxation system is unfavorable (relative to other forms); – it shall not be a payer of 5% single tax. It is used only by foreign companies. An advantage is the possibility of simplified visa support for its employees in Ukraine.
Which business models of IT companies are used in Ukraine?
- Working through an Individual Entrepreneur under a service agreement.
A Ukrainian LLC (TOV) or a foreign company orders development services, testing, and other IT services from the Individual Entrepreneur (FOP). In such a case, an agreement shall be concluded between the parties, or, in general, any work shall be performed in accordance with an invoice. The developers may work at home or in the office, which may not be related to the customer.
Pluses: relatively low costs. Absence of social (labor) obligations of the customer.
Minuses: risks of being fined for violation of labor and tax laws, recognition of the Ukrainian office as a “permanent establishment”.
- Working through an Individual Entrepreneur in an open space office environment.
The Ukrainian company rents out/ subrents its office to IT-employees (Individual Entrepreneur (FOP). In parallel with the Individual Entrepreneur, an agreement of software development shall be concluded. Ideally, the customer shall be another company, not the lessor.
Such a model avoids accusations that it is a permanent establishment and that IT employees have employment relationships with the customer.
Pluses: lesser risks of being fined.
Minuses: higher tax burden (the need to pay VAT in the context of (sub) renting the office); additional costs for the transit of money through the Individual Entrepreneur to pay rent, additional reporting.
- Working through an LLC (TOV): only employees.
A Ukrainian LLC (TOV) may provide any IT-services to any Ukrainian companies and citizens, as well as to foreign ones. All developers, testers, HR and other employees shall be employed on a full-time basis, i.e., employment contracts shall be concluded with them.
Pluses: minimum risks of being fined for violation of labor laws, because the Individual Entrepreneur is not used.
Minuses: high tax burden (compared with other models), salary payments to employees only in UAH (currency losses), and need for a social package in accordance with the labor legislation of Ukraine.
- Mixed model
In such a case, one part of IT services is ordered from a Ukrainian LLC (TOV) (being performed by its employees), and another part – from an Individual Entrepreneur (FOP).
Pluses: the possibility to take advantage of all other models.
Minuses: it requires more complex internal accounting and control.
- Representative office
Representative office (permanent establishment) places orders with Ukrainian residents in accordance with the contracts.
Pluses: prestige, absence of labor relationships with developers.
Minuses: unfavorable tax burden, high cost of maintaining a permanent establishment.
6. Unreported employment
Any work shall be performed by individual freelancers, any payments shall be effected through a bank or payment systems (for example, PayPal). It is appropriate for small projects.
Pluses: it is the least expensive model.
Minuses: it will be a high risk of being fined if inspection proves a systematic relationship with the freelancers.
What shall be done, from a legal point of view, to form an IT company in Ukraine?
The specific steps depend on the model you have chosen for your IT project. However, in general, it is necessary:
- To form a company (by choosing the optimal tax system).
- To conclude rental agreements for the office and for purchasing equipment, and to buy licenses for the required software.
- To develop and approve the company’s internal security policies (at the request of the business owner).
- To set up a payment system for settlements with its personnel.
- To conclude agreements with its personnel (including mandatory provisions on the transfer of intellectual property rights to you).
- To formalize an agreement with the customers/end users, taking into account the requirements of the Ukrainian legislation.
- To register intellectual property rights to the product (if necessary).
You can contact the Zilver Law Company for any legal issues of formation of an IT company in Ukraine, drawing up agreements, registering and protecting intellectual property rights to the software, legal support for an IT company in Ukraine and abroad. Our lawyers have helped not only form IT companies starting from scratch, but also accompanied the opening of the offices of foreign IT companies in Ukraine, and they continue to provide legal services on a wide range of issues to such companies.
You can contact the Zilver law company (Kyiv, Ukraine) by phone: +380980027825 or meet with our lawyers at: https://g.page/zilver-law-firm-kyiv.