Timchenko Katerina Legal advice on doing business in Ukraine

IT Business in Ukraine

                                                                                                                                  Updated November, 2012

IT Business is one of the booming industries in Ukraine, as the country can offer qualified development staff and the associated tax rates are comparatively low, which makes Ukraine appealing for foreign investors in IT domain.

More than 2/3 of the world IT companies benefit from outsourced IT services. As of 2011 Ukraine holds the fifth position in the world as IT supplier based on the scope of rendered services and the fourth position in the number of certified IT specialists, following the USA India, and Russia.

In 2011 the volume of IT outsourcing and software development services provided in Ukraine reached US$ 1.1 billion and the number of IT specialists working in the industry reached 25,000 people with 20% growth.

The above facts and figures are taken from "Exploring Ukraine. IT Outsourcing Industry" report, published by Ukrainian Hi-Tech Initiative, association of Ukrainian software development and IT outsourcing companies.

In spite of the fact that legislation of Ukraine is being rapidly changed, which is not good factor for investments, the changes usually have positive direction for IT industry. Below the most popular business models used for IT services, provided in Ukraine, are presented.

Efficient business approach for IT-companies in Ukraine

IT business operation model, by which software developers are engaged as private entrepreneurs, is the most tax-effective in Ukraine. The companies, engaging software developers, take up the registration process and keep records of their operations with developers as private entrepreneurs. The model is obviously tax beneficial.

The difference between taxation of private entrepreneur and employee is significant. The private entrepreneur shall pay 5 % of unified income tax plus about USD 50 monthly social fund contribution. The employee shall pay standard tax rate on employment income is 15 % of the salary. In addition the employer shall accrue social contribution at the rate of 36,76 % and withhold up to 3,6 % of the salary.

It should be noted that there is a difference in social protection of a private entrepreneur and an employee in Ukraine the same as in other countries. The employee is more protected, by Labor Law first of all. The private entrepreneur activity is governed by Business laws, which make him equal to the entity and reduces his social guarantees. IT developers in Ukraine should choose between more money and more guarantees, which are not always efficiently applied in Ukraine. Thus the IT developers usually choose the latter option of being private entrepreneur.

Some IT companies (usually big ones) in Ukraine put taxes on private entrepreneurs, others compensate the taxes and organize their payment by themselves.

The funds obtained by Ukrainian IT company are distributed to contracted private entrepreneurs and thus the income from out-sourcing activity is deductable. Taxation of the business model is rather tax efficient.

Cooperation of Ukrainian software developer with foreign customer directly

Software developers being private entrepreneurs can cooperate with a foreign customers directly. No extra licenses or permits are needed

To provide IT services the entrepreneur would need to conclude a foreign-economic double language (Ukrainian part is a must) agreement, and to provide it to bank for currency control. All payments shall be closed by special documents (protocol of acceptance), signed by parties upon each task completion.

From tax perspective there is no difference for Ukrainian private entrepreneur between cooperation with Ukrainian and foreign customer.

There are some changes in law to be implemented beginning January 2013 through the end of 2022. In this period the corporate profit tax rate for IT companies shall amount to 5 %, contrary to 19 % standard CPT rate to be effective for the year 2013 (the rate for 2012 is 21 %). To apply this rate the company shall meet some financial requirements and shall not be a newly formed (half a year old at least) company. Also the new law provides that the transfer of software product is not VATable for a company, which meets the above requirements.

Lots of IT-companies are quite skeptical about the above privileges provided by the new law. The initial draft of the law provided the low individual income tax for employees. This could affect the business to employ IT developers instead of contracting them as private entrepreneurs. But still the legislation and taxation in Ukraine is already quite favorable for IT business.

I would like to end up the article with the words of one Danish businessman, who is owner of the biggest IT Company in Ukraine with USD 60 million of annual turnover. After more then 10 years of building successful IT company in Ukraine he said that one of his best business decision was choosing Ukraine for IT business development.