Foreign Companies Cooperating with Individual Entrepreneurs to Start a Business in Ukraine
When starting a business in Ukraine, foreign companies sometimes look for options different from the traditional ways to register a company or a representative office. Today, such alternatives are outstaffing, cooperation with natural persons (under a civil law contract) or individual entrepreneurs. Let us take a closer look at the last option.
Who chooses to start a business by means of cooperation with individual entrepreneurs?
In practice, these are foreign companies with the following plans regarding Ukraine:
- a small team (1-5 people);
- remote work;
- expenses for labor remuneration only;
- export of services (mainly IT) directly to a foreign company.
In such cases, the benefits of cooperating with an individual entrepreneur under a direct Foreign Agreement are obvious:
- No costs for company/representative office registration, maintenance or management
- No need to file financial reports or pay taxes in Ukraine, as it is the individual entrepreneur who must file financial reports, pay taxes and bear full responsibility for failure to do so
- Labor remuneration is paid to individual entrepreneurs in foreign currency directly from the company's bank account without the need to open a bank account in Ukraine
- The company is free to choose the governing law for the Foreign Agreement with the individual entrepreneur;
- The terms of the Agreement with the individual entrepreneur(s) – i.e., the rights, obligations, responsibility of each Party, etc. - are negotiable.
However, when choosing this model of cooperation, companies must assess possible risks. Over the past couple of years, Ukrainian laws regulating business relations with individual entrepreneurs have been changed, with authorities claiming more changes are coming soon.
E.g., we are talking about Laws 466 and 1117, that changed the definition of a permanent representative office of a foreign company in Ukraine and which imposed a fine for non-residents engaging in business activities without getting their company registered in Ukraine (100,000 UAH, which is roughly about 3200 EUR). The tax authorities also oblige non-residents to pay Corporate Income Tax if an unregistered permanent representative office is detected.
Since the beginning of 2021, the Verkhovna Rada of Ukraine has been considering Bill 5054, which is going to provide legal definition of the concept of “labor relations” and of the signs of their existence. Meanwhile, the signs of labor relations have already been defined in judicial practice, and courts have been referencing them when considering claims of companies demanding that tax authorities abolish fines for “unregistered” employees or tax payments.
So, when choosing cooperation with an individual entrepreneur, companies need to analyze in each individual case whether there are any risks of that the individual entrepreneur could be recognized as permanent representative office of a non-resident company in Ukraine, or as an employee of the company.
Accountor Ukraine is experienced in providing legal, accounting and tax analysis for foreign companies in Ukraine. We will be happy to help you choose the most optimal form for doing business in Ukraine, to help you get your company registered, and to provide support where necessary.