We can provide you with full range of legal, tax and advisory services if you intend to outsource employees in Ukraine. We offer high-end legal and accounting solutions and financial/tax strategies that will ensure a stable and reliable flow of money to and from your Ukrainian software development hub.
How to outsource IT specialists, programmers and engineers in Ukraine?
Of course we will not write here any information about illegal contracting, or when you use cash or e-money to pay your Ukraine-based employees or contractors. A lawyer is not required for that, at least to make it work. We want to inform you about the proper and legitimate ways for outsourcing. There are two of the most popular legitimate strategies to organize your company in Ukraine.
The first way is via establishing an IT company in Ukraine
The Ukraine tax code has set up a 5% corporate profit tax rate (instead of 18% general profit tax rate) for IT companies. Ukraine company formation can be completed within a week. The company can be founded by you as an individual or by your holding company. If you use a holding company to invoice clients, you can use this entity to establish a company or a branch in Ukraine. In this way, your Ukrainian contractors will be hired as official employees. The main benefit of this strategy is total transparency and security. Also, if you hire your IT programmers or engineers as an employees, you will be able to completely control their job in the most effective way. It will be possible to introduce corporate rules, rights and obligations, penalties and sanctions. Regarding informational security and non-disclosure terms, the best way to control it is if your contractor is an official employee. An NDA can be prepared as a part of an employment contract, including responsibilities, requirements, and regulations. Depending on your business type, keep in mind that this way is the best one if you are thinking about selling your company after it reaches some certain level of market capitalization or profitability. In case your Ukrainian office will be a part of your main company that will increase the weight and authority of the holding company. This is the only legal way that will allow your company to pass due diligence during M&A successfully.
But this way has one very big disadvantage: a salary tax rate of almost 42%. In Ukraine an employer is responsible to hold and transfer all payroll taxes and fees to the Tax Authority. It is also fundamental to understand that in Ukraine when you offer a certain amount of salary, your future employee will expect a net after-tax amount. This is not the law, but this is how the things are in this country. So if you offer to pay a $1000 salary, you have to spend at least $1420. For some IT corporations such a tax rate is normal, for some it is too high. That’s why almost 40% of all IT companies in Ukraine avoid this way to reduce taxes, using an FOP scheme.
The second way is via contracting work to independent contractors (so called FOP)
In Ukraine, an “FOP” is what in America is called an “independent contractor.” Such a legal form allows an individual person to conduct business activities in certain spheres, have a business bank account and also provide engineering or software development or programming or other services. FOP can be registered as single (or so called fixed) tax system and pay 5% revenue tax. This is markedly lower than most other countries, such as the USA which demands at least 15.3%. An FOP can also export their services. Their clients can be both individuals and legal entities. So if you have a company in the United States or in Hong Kong or in the United Kingdom or wherever, your Ukrainian FOP is able to invoice your company. Also, for this strategy you do not need to have your own company in or registered representative office in Ukraine. Your programmers in this case can not be called employees, as from the legal side they will be your contractors or service providers. But this way to hire brains from Ukraine will do only if you are going to hire not more than 5 people and only if you are not going to provide them with a work space or equipment.
To be able to outsource a programmer or so called service provider you need to ensure the following:
- Your service provider shall be registered as FOP;
- They shall be formed as 3-rd group single taxpayer and have a bank business bank account;
- Prepare an agreement (contract), that will include (if needed) a non-disclosure requirements;
Please consider that if your company is a mid-sized or large one, it is unlikely that you will be interested in using this scheme for long-term cooperation. But this way for IT outsourcing is perfect if you are going to hire a freelancer. Consider also that if you hire only FOPs, you will not have to pay any taxes in Ukraine. Export of services from Ukraine is exempt from VAT and is not taxable at all.The bad thing is that it is impossible to introduce a complete system of corporate management. You are able to control such freelancer only according to your contract.
How to establish an IT company in Ukraine?
As was mentioned above, Ukraine tax laws do allow some special tax rates for software developments according to certain criteria and requirements. The main requirements are in the activities that the company performs and which are displayed in contracts, bills and qualifications of employees. Types of economic activity for the provision of services in the IT sphere in order to determine the right of the company to apply for special tax rates are:
- Software Development, including the issuance and implementation (sale, rental and / or licensing) of system software packages, service and gaming programs, issuing of finished (non-system) software, including the translation or adaptation of non-system software for a particular market using own financial resources: operating systems, business and other applications; release of computer games for all platforms;
- Computer Programming and all types of writing, modifying, testing, and providing technical support, documenting software (including using commercial or freely distributed modules), including developing the structure and content and / or writing the system of commands required for the creation and execution of: system software (including recovery), applications (including recovery), databases, websites (including their audiovisual elements); Configuring software, that is, modifying and configuring existing applications, so that it functions within the client’s information system; the development of customized software (custom) and the adaptation of software packages to the needs of users; writing programmatic accompanying instructions for users;
- Informational Consulting, including the planning and development of computer systems combining component equipment, software and communication technologies, counseling on the type and configuration of computer hardware and the use of software technologies: analysis of information needs of users and the search for the most optimal solutions, consulting on software product development and assistance with regard to the technical aspects of computer systems, consul the maintenance of the work of software and informatization;
- Management of Computer Equipment, including the provision of services for local management and operation of computer systems of clients, as well as data processing and other related services, operation on a long-term (permanent) basis of data processing facilities owned by other users;
- IT Solutions, creation and implementation of information and technical complexes, systems and networks concerning: design and creation of complexes, systems and networks based on information technologies, data transmission systems and data storage systems, installation and installation of electronic computers and other equipment for information processing; maintenance and support of complexes, systems and networks built on the basis of information technologies; installation of software for reward, including implementation, installation, implementation, integration with other systems, support (debugging, consulting on development and operation, modification and refinement, correction of errors); development of cryptographic means of information protection; Granting the right to use the software, including the transfer of intellectual property rights to software (computer programs);
- Data Processing, storage of information on web sites and related activities, including activities related to databases: providing data in a specific order or sequence by choosing them online or direct access to operational data , sorted by request, for a wide or limited range of users (computerized management); processing, preparing and entering data using the software of the user or its own software.
To have the right to pay a 5% corporate tax, the company has to be working for at least 2 full quarters. There is a special procedure for IT company registration, which is processed through Ukrainian Fiscal Service. Also the fiscal authority will perform due diligence (a company tax audit) before the company receives a tax certificate of registration the software development register.
Ukraine is one of the countries with the fastest growing IT sector. Ukrainian IT workers are a smart and fast learning people. And Ukraine is one of the best countries for IT outsourcing. As a Ukrainian Law firm we see that Ukrainian agriculture and IT companies have the fastest growth and increasing cash flow. In 2019 more that 15% of all money transfer in Ukraine was for information technology and engineering services. Since the 2014 period of high inflation, the IT sector has had a stabilizing effect on the Ukrainian currency (UAH) by bringing in money from abroad. That means that every day programmers bring more and more currency in Ukraine, making our economy more diversified and stable. The Ukrainian government has no intention of hindering IT and engineering companies with high or complicated taxation. That doesn’t mean, however, that the Ukrainian Government doesn’t expect any taxes at all!
This information is purely informative and we are not responsible for failure or any outcomes, except if we took direct part in it. Please always remember, and it is fundamental, that the strategy of money flow to your Ukrainian contractors shall be approved both by your lawyer and accountant. You, as the service supplier, must make sure that your Ukrainian workers feel comfortable and safe working with you.