Establishing a business in Ukraine
Reviewing key points of doing business in Ukraine.
June 25, 2019 - Irina Voyevodina Marta Sverdlikovskaya - Analysis
In recent years, Ukrainian lawmakers have tried to simplify the conditions for opening companies and doing business in Ukraine. It concerns, in particular, corporate and currency legislation, which have faced significant changes within the last two years.
Form of business activity
Business activities of a non-resident in the territory of Ukraine may be performed either by means of registration of the representative office or opening the company. One of the main differences is that the representative office is not a legal entity and its responsibility is not limited to the authorised capital. Therefore the founder’s choice often falls on establishment of the company.
While choosing legal form of the Ukrainian company, the most frequent variant is a limited liability company. Such form of company is well regulated by the legislation of Ukraine and allows solving all the typical tasks of the foreign founder, without any unnecessary additional formalities (e.g. issuing shares, as compared to a joint-stock company).
Founder and director of the company
Founders of Ukrainian companies can be both natural persons and legal entities – non-residents (either sole or jointly with business partners).
The Constitution of Ukraine prescribes that foreign citizens in the territory of Ukraine shall have the same rights and obligations as the Ukrainian citizens. The main requirement is that a non-resident of Ukraine shall reside in the territory of Ukraine legally. In order to incorporate the Ukrainian company, the foreign founder natural person shall first obtain a Ukrainian taxpayer code.
A non-resident (but only a natural person) may also be the director of the Ukrainian company. However, first of all he/she shall obtain a work permit. In the absence of such a document, the first director may be the Ukrainian citizen or a non-resident already having Ukrainian residence permit. Immediately after the company is incorporated in accordance with the law, a non-resident may obtain a work permit and commence the procedure for changing management.
In the framework of the anti-corruption strategy in Ukraine, amendments were made to several legislative acts. According to the law the companies established in accordance with the legislation of Ukraine shall provide information to the state registrar regarding their ultimate beneficiary owners (i.e. ultimate natural persons owning over 25 per cent of shares in the company).
Information about ultimate beneficiary owners of companies shall be published in the open state register of legal entities and natural persons – entrepreneurs.
Authorised capital and limited liability
Authorised capital of a limited liability company is divided into shares owned by founders of the company, which is the main attractiveness of limited liability companies. Meaning that members of the company shall not be liable for obligations of the company and shall bear the risk of losses associated with the LLC activities, but only within the value of their paid contributions.
Minimum authorised capital is not provided by law. It is reasonable to form authorised capital in the amount that will allow to cover the costs of the initial maintenance of the company before it reaches profitability (rent and maintenance of premises, payment of salaries to employees, etc.). Authorised capital shall be paid by members within 6 months from the date of state registration of the company, unless otherwise provided by the Articles.
Ukrainian legislation provides two taxation systems: general and simplified (unified tax)*. However, simplified system shall not apply to a company with over 25 per cent owned by non-resident legal entities. So, a limited liability company with a foreign member – legal entity owning over 25 per cent shall be subject to taxation under the general system.
Principal tax that payable under the general system shall be income tax, at the rate of 18 per cent.
The enterprise whose volume of operations for the last 12 calendar months reached 1 million hryvnia (equal to 33,000 euros) shall be subject to mandatory registration as value added tax payer, at the rate of 20 per cent. If necessary, the company may get registered as VAT payer on a voluntary basis.
As an employer, the company shall deduct from its employees’ salaries 18 per cent of the natural person’s income, 1.5 per cent of the war tax and 22 per cent of the unified social contribution.
*Simplified system (unified tax) is a special mechanism of taxation, where payment of separate taxes and fees is replaced by payment of single tax. The single tax rate (for the 3rd group of taxpayers, which is the most common group for companies) is 5 per cent and 3 per cent (for VAT payers) with an annual income limit of up to 5 million hryvnia.
Dividends shall be distributed from net profit of the company following payment of all mandatory taxes and fees to the budget.
While paying dividends in favour of non-residents, LLC shall withhold repatriation tax from non-resident‘s income (i.e. tax on non-resident’s income originated from Ukraine). The overall rate shall make up 15 per cent, unless otherwise provided by applicable international double taxation agreements.
Despite commencement of currency liberalisation, Ukraine still has some restrictions on paying dividends in favour of foreign investors. In particular, currently the National Bank of Ukraine allows purchase/remittance of foreign currency for the purpose of returning dividends abroad to a foreign investor for the period till 2018 (inclusive) and within the aggregate amount not exceeding 12 million euros.
Restrictions for non-residents
Despite the regime, being the same as for the Ukrainian citizens, in Ukraine there are still left some restrictions for non-residents, for example: foreigners are not entitled to acquire agricultural lands as ownership (an alternative variant may be long-term lease).
Positive changes in corporate legislation
On June 17, 2018, the new Law of Ukraine “On Limited and Additional Liability Companies” entered into force, which is a very long-expected for Ukraine. The new Law replaced outdated and complex previous legislation and eliminated the controversial aspects of previous legislation. Imperative norms (e.g. procedure for convening and holding a general meeting, thresholds of voting, etc.) were replaced by permissive norms, by which doing business became easier.
Besides, now founders have opportunity to enter into shareholders’ agreements which are regulated and protected by the legislation of Ukraine. Institution of shareholders’ agreements is well known in the countries of Anglo-Saxon law system, but was almost never used in Ukraine before under the laws of Ukraine.
On February 7, 2019, the new law “On Currency and Currency Operations” entered into force, which replaced the strict currency regulation of previous years. This law is the first step in the course of Ukraine’s currency liberalisation and eventually should lead to removal of currency restrictions and the simplification of currency transactions.
Marta Sverdlikovskaya is a lawyer with Interlegal
Irina Voyevodina is a partner with Interlegal and a member of the Ukrainian section Women’s International Shipping & Trading Association .