The most common for conducting business activities in Ukraine are limited liability companies (“LLCs”) and joint stock companies (“JSCs”), both of which embody the concept of limited liability for investors.
In choosing between an LLC and a private JSC in establishing a whollyowned subsidiary, LLCs appear to be more popular than private JSCs due to the various establishment and operational considerations. The main general corporate benefit of an LLC in comparison with a JSC is that the procedure for the establishment and operation of an LLC is significantly less burdensome and time-consuming. An LLC does not have to issue shares or perform the procedural steps required for issuing shares. The absence of shares in an LLC makes this form of legal entity more mobile and flexible when the participants of the LLC have to change (increase or decrease) the charter capital of the company.
Representative offices are deemed to be structural divisions of an enterprise, located in localities different from that of the headquarters of the enterprise.
“Branches” do not technically exist in Ukraine but representative offices are their closest equivalent.
The manager of a representative office must act on the basis of a special power of attorney issued by the management of his/her founding enterprise.
A foreign legal entity may establish its representative office in Ukraine to carry out marketing, promotional and other auxiliary functions on behalf of the foreign legal entity.
It is not clear whether a foreign legal entity may conduct trade or business through a representative office, although “commercial” representative offices (in effect, the equivalent of “branches” in most other countries) are quite common in Ukraine.
The practice has been to permit a representative office to carry out a wide range of commercial activities (including signing contracts and implementating imports, exports and other transactions).
Normally, such practices result in the creation of a permanent establishment for such foreign companies in Ukraine for the purposes of Ukrainian corporate income tax legislation and, thus, the commercial representative office’s activities become taxable in Ukraine on a general basis (whereas, generally speaking, the activities of a representative office are non- taxable).
Representative offices of foreign legal entities must be registered with the Ministry of Economic Development and Trade of Ukraine. A one-time registration fee of USD 2,500 is payable.
The state registration of the Representative Office takes up to 70 business days from which registration with the Ministry of Economic Development and Trade of Ukraine takes 60 business days and registration with other state authorities takes approximately 10 business days.
Current Ukrainian legislation fails to provide any guidance on the procedure to be followed by a foreign business entity to open a branch in Ukraine. As a result, in practice, foreign legal entities do not carry out their business activities in Ukraine through branches, but rather through either their (commercial) representative offices registered as permanent establishments, or their wholly-owned Ukrainian subsidiaries, which are usually established in the form of LLCs.
The general principles of the Ukrainian tax system, as well as the taxes and duties (mandatory payments) which may be levied in Ukraine, are defined in Law No. 2755-VI of 2 December 2010 of the Tax Code of Ukraine (“Tax Code”). The Tax Code stipulates that tax rates, tax exemptions and the procedures and mechanisms for tax assessments and payments may not be introduced or changed by legislative acts other than those introducing changes to the Tax Code. In addition, any changes or amendments with regard to the determination of tax rates, tax exemptions and procedures and mechanisms for their assessment and payment may be introduced into tax legislation not less than six months before the beginning of a new budget year.
Resident business entities that generate profits from their activity both within and outside the territory of Ukraine;
Foreign legal entities that derive profits from Ukrainian sources (with the exception of diplomatic establishments and other organizations enjoying immunity from taxation);
Permanent establishments of foreign entities, which such foreign entities may acquire either through their fixed place of business in Ukraine or through a Ukrainian resident entity
Religious and charity organizations;
Other non-profit organizations
The Tax Code establishes the following general principles for taxation of foreign legal entities:
The Tax Code provides that a foreign entity is liable for the payment of CIT with respect to all “Ukrainian-sourced” income. Article 141.4 of the Tax Code provides a non-exhaustive list of the types of income, which are, per se, deemed to constitute Ukrainian-sourced income, including:
Read about Double Taxation Treaties (pages 49-64)
“Permanent establishment of a foreign entity” in Ukraine is created:
In accordance with Article 180.1 of the Tax Code, any Ukrainian or non-Ukrainian legal entity will be required to pay VAT, if that entity:
The basic VAT rate is 20% of the contractual value of the relevant goods (services), but not less than the original purchase price thereof or, in case of the sale of produced goods, not less than the arm’s length value thereof (for goods imported into Ukraine, this value cannot be lower than their customs value with the excise tax and import customs duty included).
A reduced rate of 7% is applied to the sale and import of medicine and medical devices.
A 0% tax rate is provided by the Tax Code for the export of goods.
Effective from 1 February 2015, Ukraine has switched to electronic VAT administration and introduced VAT accounts. On 1 July 2017, Ukraine introduced a system of automatic blocking of risk-bearing VAT invoices (what constitutes a risk factor is specifically determined in the legislation)
Issues of personal income taxation are principally regulated by the Tax Code, including tax rates, tax residency rules and determination of taxable income, tax administration, tax credit rules and others.
Effective from 1 January 2016, the general tax rate applicable to almost all income received by a resident individual in Ukraine is 18%. Tax residents can benefit from certain tax exemptions and reduced tax rates (e.g., 5% applicable to income from sales of real estate and movable property; under certain conditions such income can be exempt). The Tax Code establishes the tax rate applicable to dividends paid by Ukrainian CIT payers at a level of 5% (9% on dividends distributed by institutes of joint investment, foreign entities and entities that do not pay Ukrainian CIT), while interest, royalties and capital gains are taxed at 18%. Winnings and prizes are subject to personal income tax at a flat rate of 18%.
Special rules of taxation are established for inherited property, securities and other specific items.
Reduced tax rates for business income and other incentives are prescribed for certain categories of individual entrepreneurs.
Additional military tax at 1.5% is levied on the income that is subject to personal income tax and a couple of categories of income that are exempt from personal income tax.
The general rule of the Tax Code is that it is the duty of the payer of sourced income, i.e., “tax agents” in the parlance of the Tax Code, to report, charge, collect and remit personal income tax to the government. Thus, employers are deemed to be tax agents with respect to the personal income tax and military tax due on the wages and salaries payable to their employees. The relevant tax returns are filed by tax agents quarterly and the remittance is made when income is paid.
The Unified Contribution to be paid by an employer is not deducted from employees’ salaries, but must be paid by the employer in addition to their salaries.
Effective from 1 January 2016, Unified Contribution is payable at a rate of 22%.
The Unified Contribution is payable by the employer at the time income is paid. All payroll taxes must be paid by wire transfer to the appropriate state treasury accounts at the same time that the employer withdraws funds from a bank to pay salaries to its employees or pays salaries to the bank accounts of its employees.
The maximum taxable base for the purposes of Unified Contribution constitutes 15 times the minimum monthly salary (which is UAH 62,595 (approx. USD 2,240) as of January 2019). Any portion of the taxable base in excess of the maximum taxable base is exempt from taxation for the purposes of Unified Contributions. The same cap, rates and rules apply for resident individuals and foreigners employed in Ukraine.
Types of Tax Audits
The Code of Laws on Labor of Ukraine (the “Labor Code”) dated 10 December 1971, as amended, applies to all Ukrainian and foreign enterprises, institutions and organizations, irrespective of their ownership form, type or area of activity, and to all individuals employing labor in Ukraine.
Employment relationships between enterprises with foreign investment (as well as representative offices of foreign legal entities) and their employees on the territory of Ukraine are governed by the applicable Ukrainian legislation and the bylaws of such enterprises. Thus, all employers (both foreign and Ukrainian) must comply with the provisions of the Labor Code, which apply regardless of whether the employee is a foreign or Ukrainian national. The employment guarantees and the social security benefits granted to employees of both representative offices of foreign companies and Ukrainian companies with foreign investment are the same as those granted to employees of other Ukrainian companies.
Both local and foreign legal entities may engage individuals in Ukraine pursuant to either employment agreements (or employment contracts, where appropriate) concluded in accordance with the Labor Code, or so- called “civil law contracts” concluded in accordance with the Civil Code (eg, an independent consultant agreement).
|Engaging individuals to work|
|Employment agreement (contract)||Civil Law contract (independent consultant agreement)|
|• concluded in accordance with the Labor Code
• generally, concluded for an unlimited period of time
• concluded for a limited period of time, if:
1) it’s within the nature of the employee’s work or the “employee’s interest”
2) it’s impossible to establish employment for an unlimited period
|• concluded in accordance with the Civil Code
• consultant should be registered with the local tax office prior to signing the civil law contract
• concluded for a certain period of time, or until certain services (works) are completed
Ukrainian law distinguishes between an “employment agreement” and an “employment contract.”
|Employment agreement||Employment contract|
|an agreement between an employee and an employer, whereby:
(1) the employee agrees to perform the work specified by this
agreement and act in accordance with the employer’s internal labor regulations
(2) the employer agrees to pay a specified salary and provide working conditions and tools
|• not necessarily a bilingual document
• can be concluded by admitting the employee to work and notifying the State Fiscal Service about recruitment of the employee
• can be concluded with any level member or staff
|• always in a written form
• may be concluded only when such a possibility is expressly provided by law (eg, with the CEO (as opposed to all other employees of a company)
• term of employment may deviate from the requirements of the Labor Code:
terms on material liability
fixed duration of the contract
remuneration and “golden parachute”
additional grounds for termination, including early termination
The principal advantage of an employment contract (compared to an employment agreement) is the discretion which its parties may exercise in the terms and conditions of employment and the termination grounds.
In addition, employers must properly record employment in the labor books of their employees.
Generally, the amount of the monthly salary accrued to the employee may not be lower than the minimum monthly salary established by law. The minimum monthly salary is subject to frequent indexation. As of 1 January 2019, the minimum monthly salary is equal to UAH 4,173 (approximately USD 150 ). The officially established minimum monthly salary is periodically adjusted by the Ukrainian parliament to reflect increases in the cost of living
Employers must pay foreign employees a minimum salary:
Under the Civil Code of Ukraine, dated 16 January 2003, as amended (the “Civil Code”), three types of property ownership (private, state and municipal) exist in Ukraine. In contrast to the former system of state and collective ownership of property in the Soviet era, private ownership is specifically recognized and honored in Ukraine.
Under Article 26 of the Constitution, foreign citizens enjoy the same rights and freedoms and bear the same responsibilities as Ukrainian citizens, including property rights. According to the Civil Code, foreign citizens and legal entities are entitled to own property in Ukraine, unless otherwise provided for in international treaties involving Ukraine or other Ukrainian laws. The Ukrainian courts ensure protection of property rights in accordance with the applicable Ukrainian laws.
The lease of real estate (with the exception of land) in Ukraine is governed by the Civil Code, the Law of Ukraine on the Lease of State and Municipal Property dated 10 April 1992, as amended (the “State Property Lease Law”), as well as other laws and regulations.
Rights to land in Ukraine
state- and municipally- owned agricultural land of any permitted use
|ban on sale|
privately-owned agricultural land relating to:
• agricultural commodity land
• individual household land allocated in kind o the owners of land shares
• land shares
|ban on sale and other alienation|
|ban on contribution to charter capital|
|ban on changes to permitted use|