- SP — sole proprietorship
- LLC — Limited Liability Company
- ITN — individual tax number
- UST — Unified Social Tax
- VAT — Value Added Tax
- B2C — Business to Customer
Ukraine, as a country that has been actively developing in recent years, has become an attractive investment destination for foreign entrepreneurs. During his foreign visits, President Volodymyr Zelensky keeps encouraging foreign businesses to invest in Ukraine, emphasizing that the country has a huge potential for development and is constantly working to improve the investment climate. Registering a company in Ukraine is a fairly simple and transparent procedure. Registration of an LLC (Limited Liability Company) for a foreigner is no different from the usual registration, but with distinctions in the paperwork.
Step 1. Obtain your Tax Payer ID
The first step to set up a business in Ukraine should be to obtain a foreigner's Tax Payer's ID aka ITN (individual tax number). This number is an element of the State Register of Individuals of Ukraine and is assigned to the taxpayer for life. The registration process was approved by the Ministry of Revenue and Duties of Ukraine (Tax Administration) on December 10, 2013, №779. https://zakon.rada.gov.ua/laws/show/z2211-13#Text The list of documents* to obtain a tax number is small and one can receive it at the Main Department of the Tax Administration State Fiscal Service of Ukraine at the address: Kyiv, Sholudenka st., 33/19. More detailed information about the contacts can be found on the official website http://kyiv.sfs.gov.ua/kontakti/. It should be mentioned there is no English version of the website. Law firms or Ukrainian-speaking partners will come in handy here. The procedure to obtain an ITN can be simplified by providing a Power of Attorney to a Ukrainian citizen. There are several options for granting a Power of Attorney:- If you are in Ukraine, you can get a document from any Ukrainian notary, including a foreign passport translation into Ukrainian;- If outside Ukraine, there are several options: — obtain a Power of Attorney from the Consulate or Embassy of Ukraine or a local notary, then send it to your proxy.
The procedure generally takes 5–7 working days. It's free for self-registration or can cost $100 to $300 depending on the speed of execution. Sometimes it can take just 1 business day.
Step 2. Legal aspects of starting a business
2.1 Choosing a type of business
Article 26 of the Constitution of Ukraine grants foreign citizens and stateless individuals who have legally arrived in Ukraine equal rights, freedoms, and responsibilities as residents of Ukraine. According to the current legislation of Ukraine, a foreigner has full rights to create and register business entities in our country, including an LLC (Limited Liability Company) and sole proprietorships (SP) without extra permits and licenses.
Both SPs and LLCs are types of legal entities that enable entrepreneurs to conduct their activities.
Additionally, there are:
- Private enterprises. This type is more similar to LLCs.
- Corporation (joint-stock corporation). The property rights are distributed in shares. Such companies have much higher requirements for reporting and doing business.
- Public and non-profit organizations. Their goal is a social activity, and in general, they are not aimed at making profits. The simplest and most common forms are SP and LLC, so we are breaking them down.
Usually, an SP (Sole Proprietorship) can be chosen when a business:
- renders services
- has small costs
- works mainly with B2C and the annual income is under UAH 7 million (250,000 USD)
- seeks cheaper accounting and other maintenance costs
In Ukraine, there are two tax systems for SPs. On the Tax Administration website, you can read more about the simplified tax system http://zak.sfs.gov.ua/media-ark/news-ark/print-301339.html and the general system http://zak.sfs.gov.ua/media-ark/news-ark/print-302516.html
We will consider the best options based on numbers. In our view, they are Sole Proprietors, Tax Group 3, (there are only three tax groups), and Sole Proprietors in the general tax system. Therefore, to open a sole proprietorship on the simplified tax system paying a Single Tax (Tax Group 3), it is necessary to factor in that there are business activities that do not grant the right to be a Single Taxpayer. They are defined by clause 291.5 of the Tax Code of Ukraine https://buhgalter911.com/uk/normativnaya-baza/nalogovyi-kodeks/rozdil-xiv-specialyni-1020951.html, and the maximum amount of annual income should not exceed 250,000 USD (UAH 7 million) in the 2021 year. Taxes for SPs Group 3 for 2021: Single tax from January 1 will be 5% of income or 3% of income plus VAT (Value Added Tax). The VAT rate in Ukraine is 20%.
Unified Social Tax (UST) effective January 1, 2021 set at UAH 1,320 per month (47 USD), and UAH 1,430 (51 USD) effective December 1, 2021.
If you do not apply for a Simplified Tax system (Single Tax) within 10 days after the registration of a sole proprietorship, it will be automatically registered in the general tax system. And if the annual income exceeds 1 million UAH, one is required to register as a VAT payer.
Taxes for sole proprietors in the general tax system:
- Personal income tax — 18%
- Military tax — 1.5%.
These taxes are calculated based on net income (the difference between revenue and costs which must be documented). If no income or the bottom line is unprofitable, the above taxes are not paid. The Unified Social Tax (UST) is mandatory. A sole proprietor must pay 22% of net income, but not less than 22% of the minimum monthly wage. In 2021, the minimum monthly wage is UAH 6,000 (213 USD) effective January 1, UAH 6,500 (230 USD) effective December 1, and the UST amount per month is UAH 1,320 (47 USD) and UAH 1,430 (51 USD), respectively. No matter whether an SP had an income or not, the UST must be paid anyway. However, if the salary is over 15 minimum salaries — 90,000 UAH (3200 USD) in 2021 then the UST is not charged.
It is noteworthy that there are no restrictions on the number of employees in these types of sole proprietorships. But for record-keeping and tax accounting, accounting services will be necessary in both cases. It can be done by a full-time accountant (costs will be at least the minimum wage of UAH 6,000 (213 USD) + 22% UST, totaling UAH 7,320 (260 USD) per month. An outsourced accountant can cost from 200 USD and up without paying his/her salary taxes. The cost of work will depend on the number of functions performed, the volume of paperwork, the availability of cash registers, the number of employees, etc.
Pros of an SP compared to an LLC
Simple registration and accounting procedure.
With revenue of up to UAH 1 million (35,000 USD), an SP need not use a cash register. That is, if the activity of a sole proprietor falls under the requirement to install a cash register, they may not use it if the annual revenue is under UAH 1 million (35 000 USD).
The physical office is optional because sole proprietors are registered at the place of residence of the individual.
From now on, foreigners do not need a residence permit to register a sole proprietorship, and the address of the location can be confirmed by other documents — for example, a real estate lease contract located in Ukraine.
The cash received is considered the funds of the entrepreneur and can be freely spent.
No need to pay dividend tax. As soon as you get payment from your clients for goods or services, these funds are immediately available for withdrawal or wiring. By contrast, an LLC's cash can not be used freely, and all costs must be confirmed by accounting documents. If a founder (member) wants to receive dividends, he/she will pay the double tax — personal income tax (or single tax) and dividend tax. Meanwhile, the sole proprietor will pay income tax (or a single tax) only once from the revenue received.
Cons of an SP
Risk of losing the property. This is the main drawback. Should any disputes about debts or litigation occur, if the sole proprietor owes someone money, he/she is liable for all debts with their property, if any. But if you do business legally, this scenario can never happen. Not all clients want to work with SPs, especially large corporations because of mistrust or due to their corporate policies.
Setting up an LLC can be recommended in the following instances:
- when there are business partners and it is necessary to distribute equity (shares) among founders and/or employees. SPs cannot do so
- the type of business activity stipulates the registration of an LLC, for example, travel agencies, insurance, financial companies, etc
- entrepreneurs who want to later sell their business share or bring in investors
- entrepreneurs who work mainly with large businesses
- when the annual income is estimated at over UAH 7 million (248,000 USD)
In Ukraine, recent legislative actions have been taken to further simplify the procedure for registering an LLC. In particular, the requirements for the minimum Authorized capital of the company have been abolished, and the paperwork required for registration has been minimized.
To register your company in Ukraine, a foreigner must provide a certain list of documents**. These documents are slightly different in cases when a foreign founder is an individual or a legal entity (a type of founder). The type of founder affects the costs of registration and the complexity of the procedure. After all, when the founder is an individual, it is enough to just get an ITN (Individual Tax Number). When registering a business founded by a foreign legal entity, a wider list of documents is required, and all these documents must be additionally apostilled and legalized if they come from a country that requires it. One of the distinctions is that a company founded by a foreign legal entity cannot be a payer of a Single Tax.
Pros of an LLC
- LLC members' liability to debtors is limited only to the capital of an LLC (the assets owned by the company)
- Ability to build a big business and attract investors and capital
- Ability to work with big businesses
- Each member must vest in the authorized capital. This amount is set in advance and put in the Company Charter.
Cons of an LLC compared to SP
- More complicated and more expensive registration. Requires authorized capital, doing paperwork: CharterMinutes of the meeting of founding members CEO assignment order, etc.
- More expensive in terms of accounting.
- Bookkeeping requires more attention and is more complex than in SPs. Besides, the legal address for an LLC is required. It can also be the address of one of the members' places of residence or a rented office.
2.2 Details of registration of LLC
The following list of documents are required for registration of an LLC:
- application for state registration of a legal entity https://minjust.gov.ua/m/zayava-schodo-derjavnoi-reestratsii-yuridichnoi-osobi-krim-gromadskih-formuvan-ta-organiv-vladi
- minutes of the meeting of founding parties or the resolution of the sole founder (prepared by a lawyer or by a notary)
- Company Charter (prepared by a lawyer or by a notary)
- application for simplified tax system https://blank.dtkt.ua/ru/blank/70 and/or application for voluntary registration as a VAT payer (form №1-VAT). All documents submitted in the Ukrainian language, and at the request of a client, documents can also be presented in a foreign language.
Founders should specify the company name (in Ukrainian and a foreign language). Lawyers check the name uniqueness in the state register, as the Law of Ukraine "State Registration of Legal Entities, Sole Proprietorships and Public Associations" forbids to register a legal entity with a name identical to another legal entity.
According to the classifier of economic activities https://zakon.rada.gov.ua/rada/show/vb457609-10#Text, it is mandatory to specify the codes of business activities the company is created for. One of these activities set as basic.
The law does not impose limits on the number of types of economic activity. However, if the company uses a simplified system of taxation, accounting, and reporting, one should keep in mind the list of prohibited activities for the first, second, third tax groups of the single tax under Article 291 of the Tax Code of Ukraine, as well as for SPs.
When doing registration paperwork, the amount of authorized capital is set, which consists of the par value of shares of the members in the national currency of Ukraine — UAH. The legislation does not impose restrictions and minimum contributions to the capital of the company. The amount is determined by the founders.
However, when choosing to set up significant authorized capital, it should be mentioned that each company member must fully deposit his/her equity stake within six months from the state registration of the company (Article 14 of the Law of Ukraine "Limited and Additional Companies liability "the period to deposit to the authorized capital was reduced from 1 year to 6 months). The amount of the capital may be later increased or decreased by the general meeting of the company's members. There are several options to deposit the company's capital:
— to deposit in UAH to the current bank account of the company;
— to deposit in foreign currency or to transfer funds from abroad, with the correct reason for payment "Contribution to the authorized capital" Oftentimes when starting a business in Ukraine, foreign citizens wish to independently manage the current activity of their own company and plan to take the position of the CEO.
By law, the CEO must be appointed within 10 days after the company registration. But a foreign citizen cannot be a CEO until he/she obtains a residence permit on the grounds of employment. Therefore, when creating a company, it is necessary to first appoint a citizen of Ukraine as the head of the company and only after obtaining an employment permit to reassign the executive. It can be either a citizen of Ukraine or a foreigner who has already obtained a permanent residence permit in Ukraine. Normally, such CEOs are considered nominal. Contracts with them are signed for a certain time, and they only sign Powers of Attorney on behalf of the legal entity, without performing any significant business operations. In contrast, a sole proprietor can carry out his/her activities personally, through employees and contractors, so, there are no requirements for the organizational structure. The document review submitted for the state registration is carried out within 24 hours after the receipt (according to the Law of Ukraine "On State Registration of Legal Entities, Individuals — Entrepreneurs and Public Associations").
After the docs review, an extract is formed — a document containing data about the legal entity and, accordingly, confirming the state registration of the legal entity. Such a document can be obtained in both electronic and paper form. Following the registration of the company, all reliable information, which is publicly available (except for registration numbers of taxpayers' registration cards and passport data), can be viewed on the portal of electronic services — the Unified State Register of Legal Entities, Individuals — Entrepreneurs and Public Associations. When registering a legal entity, many foreigners might be interested in the fact that being a business owner in Ukraine and having issued a work permit for 1 or 3 years, he/she gets the ability to apply for a temporary residence permit in Ukraine also for 1 or 3 years. This being said, many confuse it comparing this as grounds for obtaining a residence permit with an investment in the Ukrainian economy of 100,000 USD. These are completely different reasons. When registering a business in Ukraine you do not need to invest $ 100,000 in the company's capital. Even if you have 1 UAH in the authorized capital, you have the right to obtain a work permit and residence permit. This will be a great advantage for those seeking to move to Ukraine but have no other grounds for obtaining a residence permit (for example, marriage to a citizen of Ukraine or study in Ukraine).
2.3. Staff Recruitment
There are usually no problems with the personnel recruitment in Ukraine for a newly created enterprise. Considering the aggregated data of the State Statistics Department of Ukraine, the State Employment Service, and one of the largest online job search websites, we can confidently conclude that the supply of labor exceeds demand. The working population with a qualification level of the average and above in Ukraine amounts to more than 60%, with a fairly low level of wages across the country. You can do recruiting both by your employee through free and low-cost web resources or with the recruiting company. Official minimum monthly wage, as noted above, shall be no lower than the minimum monthly wage of UAH 6,000 (220 USD) + 22% UST (Unified Social Tax), totaling UAH 7,320 per month (260 USD). But this is the minimum wage. The level of a specialist's salary directly depends on his/her functions, personal qualities, and plenty of other factors. On November 1, 2020, the Department of Social Policy of Ukraine reported that the average Ukrainian salary in the capital city Kyiv is UAH 17,494 (600 USD) and UAH 11,579 (415 USD) per month across Ukraine, excluding taxes. Wage taxes in Ukraine are as follows (paid by companies): 18% income tax1.5% military tax 22% unified social tax.
Step 3. Profit and taxes
You can receive a profit from an existing company in different ways. It may be in the form of paying wages to a foreigner as a CEO of the company. The wage size is not limited, but the following taxes are charged: 18% personal income tax, 1.5% military duty, as well as 22% unified social tax for salary less than 97,500 UAH (3460 USD) in 2021.
Another way to get the profit is to pay dividends. The final amount of dividends is calculated based on the company's net profit, i.e. from the money that remained after the payment of all taxes, budget fees, and other mandatory payments. Dividends are considered passive income and are subject to taxation. The tax amount varies and depends on who is the issuer of shares and the recipient of payments on them.
If the issuer of shares is an enterprise-payer of corporate profits tax, and the recipient is an individual (including a non-resident), the tax is 5% of the dividend amount. If the shares are issued by a legal entity that pays a single tax, then 9% of the tax is levied on individuals receiving dividends. Extra 1.5% of the military tax is paid. Resident legal entities pay 18% tax on dividends received. Taxation is more difficult for non-resident legal entities: they pay 18% profits tax and 15% non-resident income tax.
* — Taxpayer's registration card according to the 1DR form (links where you can download the form http://zt.sfs.gov.ua/okremi-storinki/arhiv1/142383.html)- passport of a foreigner, a certified translation into Ukrainian and its copy (can be obtained from a notary)
** For individuals:
- Notarized power of attorney for signing the charter and registration of all documents for the legal entity (in case the registration is being carried out by a proxy)
- A copy of a founder's passport must be translated into Ukrainian. It is also necessary to notarize the translator's signature
- A copy of the taxpayer's card (identification tax number that must be obtained in Ukraine)
- A list of economic activities for the would-be company, according to the National Classifier of Ukraine https://zakon.rada.gov.ua/rada/show/vb457609-10#Text
For a legal entity:
- Extract from the trade register on registration of a non-resident legal entity. (Consular legalization with the translation into Ukrainian)
- Minutes from a non-resident legal entity (On the establishment of a company in Ukraine with a notarized translation)
- If the documents from the legal entity of the non-resident are signed by its CEO — the document confirming his/her powers (consular legalization with the translation into Ukrainian)
- If the documents from a non-resident legal entity are signed by proxy — a notarized power of attorney for the person is required (consular legalization with the translation into Ukrainian)
- Notarized passport translation of the CEO or the proxy
Application for state registration of a legal entity (https://minjust.gov.ua/files/general/2020/06/02/20200602173246-51.pdf )
The Application form for the State Registration of the legal entity includes details on the ownership of the founders — legal entities, which makes it possible to identify natural entities of the substantial share of these legal entities and contains the following data on these individuals:
- First name
- Last name
- Patronymic (if any)
- Country of citizenship
- Passport number
- Place of residence
- TIN (Taxpayer Identification Number) if any
- Ultimate beneficiary of the legal entity, including the ultimate beneficiary of its founders (members), if the founder (participant) is a legal entity.
Filling out an Application for state registration:
- The application shall be filled out in block letters
- If a certain page of the application is not filled in due to the lack of data, the page shall not be signed by the applicant and shall not be filed
- The application may be printed on both sides of the sheet
- Check the selected fields with "V" or a similar symbol
- Information on the ultimate beneficiary of the legal entity shall be completed and updated further down the road only if one of the founders is a legal entity
- Information on the ultimate beneficial owners of the legal entity or the founder of the legal entity in the state registration of changes or reorganization of the legal entity shall be completed only when the ultimate beneficial owner's details have been updated
- Filling in excessive data is allowed and is not the reason for the suspension of documents' review. Similarly, when state registration of closure of business by a sole proprietor.
Please, pay attention that all legal entities (except for political parties, trade unions, creative unions, employers' organizations, and their associations, bar associations, chambers of commerce and industry, condominium associations) shall submit and further update information about the ultimate beneficiary of a legal entity or a founder of a legal entity.
Please note: Applications for a simplified taxation system or voluntary registration as VAT payer or listing in the Register of Non-profit Institutions and Organizations shall be submitted from the date when the corresponding announcement has been posted on the website of the Ministry of Justice of Ukraine.