What is production relocation and when is it appropriate

Production relocation is the transfer of all or part of a manufacturing process to another country. Depending on the scale and strategy, this can take different forms: from fully closing the Ukrainian enterprise and opening a new one abroad to partially relocating individual production lines while maintaining the domestic base.

Main business reasons

• Safety and business continuity. Active hostilities or the risk of their expansion to the region where the enterprise operates have been the most relevant reason for Ukrainian businesses since 2022. Preserving production assets and ensuring supplies to customers often proves more important than any financial calculation.
• Access to new markets. Having a production presence in a particular country can simplify certification, reduce customs costs, and shorten delivery times to the end consumer.
• Cost reduction. Differences in labor, energy, rent, or raw material costs between countries can have a significant impact on production costs, particularly in labor-intensive or energy-intensive industries.
• Regulatory advantages. Some jurisdictions offer special economic zones, tax holidays, or expedited permitting procedures for new production facilities.
• Proximity to suppliers or customers. Shortening the supply chain reduces costs and dependence on external factors.

Key models

Subsidiary. A separate legal entity in the destination country, wholly or partially controlled by the parent company. It provides full control but requires more resources for administration.

Branch or representative office. A structural unit without separate legal personality. It is generally easier to register but may create permanent establishment (PE) risks, meaning that tax obligations may arise in the country of presence.

Contract manufacturing. Production through a local partner based on the customer’s technical specifications and standards. It offers the fastest start and minimal capital expenditure, but involves limited quality control and the risk of know-how transfer.

Joint venture. A jointly owned structure established with a local partner. Market entry is facilitated by the partner’s local knowledge, but it requires a carefully drafted shareholders’ agreement.

How to choose a country for relocation

Choosing a jurisdiction is a decision that is difficult to reverse once investments have been made. A common mistake is to assess a country based on a single parameter, such as the tax rate or labor costs, while underestimating other factors.

Financial factors

• Corporate tax rate and the availability of a DTA (double tax treaty) with Ukraine.
• VAT rates and the VAT refund mechanism for manufacturing exporters.
• Labor costs: not only salaries but also mandatory employer social contributions.
• Electricity and gas costs, which are critical factors for energy-intensive production.
• Leasing or purchasing industrial premises and construction costs.

Market and logistics factors

• Access to target sales markets: customs agreements and preferential regimes (for example, the EU-Ukraine Agreement).
• Proximity to suppliers of raw materials and components.
• Quality of transport and logistics infrastructure: ports, railways, roads, and customs terminals.
• Availability of qualified labor in the region.

Regulatory and political factors

• Stability of legislation and enforcement: do the rules of the game change after elections or a change of government?
• Corruption perception index and the actual practice of obtaining permits.
• Availability of special economic zones (SEZs) or industrial parks with infrastructure and incentives.
• Government support programs for foreign investors: grants, subsidies, and compensation for employee training costs.

ℹ️ Practical rule: assess not only the conditions for entering the market, such as registration and launch incentives, but also the conditions for exiting it: how difficult and costly it will be to wind down or relocate production if the business model changes. Some jurisdictions offer attractive entry conditions but make exit significantly more complicated.

Legal formalities and corporate structure

Registration of a legal entity

Most foreign jurisdictions allow non-residents to register companies without mandatory participation of a local partner. However, there are exceptions: certain industries, such as defense, natural resources, media, and telecommunications, or specific countries may impose restrictions or require a minimum shareholding by a local shareholder.

Registration typically requires notarized and apostilled documents of the founder (or legalized documents if the country is not a party to the Hague Convention), constitutional documents, a resolution on incorporation, and documents relating to directors and ultimate beneficial owners (UBO declaration).

Requirements for foreign investors

• Minimum share capital: in some countries, this can be substantial for manufacturing businesses.
• Local director or secretary requirement, similar to requirements applicable to trading companies.
• Substance requirements: a genuine local presence, including an office, employees, and decision-making taking place locally. Without sufficient substance, preferential tax regimes may not apply, and the risk of the structure being treated as involving a “non-cooperative” jurisdiction increases.
• Registration with industry-specific regulatory authorities separately from corporate registration.

Bank accounts and KYC/AML

Opening a bank account for a manufacturing company with a foreign beneficial owner is a separate and often underestimated challenge. Banks may request evidence of the business model, customer contracts or letters of intent (LOIs), documents confirming the source of share capital, and a complete KYC package for all beneficial owners and directors. For companies with Ukrainian founders, banking compliance can be more challenging in some jurisdictions due to increased scrutiny of risks associated with martial law.

Strategy: prepare documents for a traditional bank in parallel with opening an account with an EMI (Wise, Revolut Business, etc.) for operational purposes while the bank’s KYC process is underway.

Choosing the optimal ownership structure

For a manufacturing business with international operations, a typical structure is: holding company (the Netherlands, Cyprus, Estonia, or another jurisdiction) → operating manufacturing company in the relocation country. This can help separate assets, optimize dividend taxation, and facilitate future investment or a potential sale of the business.

⚠️ CFC rules: if the owner is a Ukrainian tax resident, the foreign structure established may fall under the controlled foreign company rules. Reporting requirements and potential taxation of undistributed CFC profits in Ukraine must be analyzed before choosing the structure.

Permits and requirements for manufacturing activities

Licenses and permits

For manufacturing businesses, the list of required permits usually covers several levels:

• Construction or reconstruction permit — if construction works are planned at the site.
• Commissioning of the facility — a separate approval required after construction or reconstruction is completed.
• Industry-specific license — for chemical, pharmaceutical, and food industries, the processing of hazardous materials, and other regulated activities.
• Permit for the use of industrial equipment — certain categories of equipment may be subject to registration with supervisory authorities.
• Environmental Permit — mandatory in the EU and most developed countries, often accompanied by an environmental impact assessment (EIA) for certain types of production.

Requirements for premises and land plots

• Verification of the permitted use of the land plot or building (zoning) — manufacturing activities are not permitted everywhere.
• Compliance with the building codes and standards of the relevant country — these may differ significantly from Ukrainian DBN standards.
• Availability of the required utilities: electricity of sufficient capacity, gas, water, sewage, and industrial wastewater drainage.
• Compliance with fire safety requirements — in most countries, this is a condition for obtaining an operating permit, not merely a recommendation.

Environmental, sanitary, and technical standards

The EU establishes harmonized requirements through directives and regulations, including the Industrial Emissions Directive and REACH for chemicals. Outside the EU, standards may be either stricter (Switzerland, Norway) or significantly more lenient. Differences in standards do not mean an absence of risks: international customers or insurers may require compliance with their own standards regardless of local legislation.

Relocation of equipment, customs and tax matters

Export of equipment from Ukraine

The export of manufacturing equipment from Ukraine during martial law is subject to a number of restrictions. Certain equipment may be classified as dual-use goods or require a special export permit. Before shipment, it is necessary to classify the equipment under the Ukrainian Classification of Goods for Foreign Economic Activity (UKTZED) codes, check for any export restrictions, and prepare the customs declaration and accompanying technical documentation.

Import of equipment into the destination country

• Import duties on industrial equipment: in most EU countries, the rate is 0% or reduced for manufacturing equipment not produced in the EU, but this must be verified for the specific CN codes.
• Import VAT: generally charged upon import, but may be recovered as input VAT after the company registers as a VAT payer.
• Temporary admission: certain equipment may qualify for temporary admission without payment of import duties if it is subsequently returned to Ukraine. This is relevant when a decision on permanent relocation has not yet been made.
• Conformity certification: equipment used in the EU must comply with CE marking requirements. If you only have Ukrainian certificates, a conformity assessment procedure will be required.

Tax matters

Permanent Establishment (PE). This is one of the most critical risks associated with relocation. If a company has a manufacturing facility, employees, and inventory in a foreign country, a PE is highly likely to arise. A PE means that profits attributable to activities in that country are taxable there. If the structure does not account for this risk, double taxation may arise.

Transfer Pricing (TP). If a foreign operating company sells products to a related party, such as a holding company or distributor in another country, the prices between them must comply with the arm’s length principle. In Ukraine, TP rules apply to transactions with related non-residents, and this aspect remains relevant even

Personnel, contracts and operational launch

Hiring local employees

Employment legislation varies significantly between countries. What is a standard condition in Ukraine, such as a probationary period, termination procedures, or overtime, may look completely different in another jurisdiction. Key issues to analyze include:

• Minimum wage and mandatory employer social contributions.
• Termination procedures and grounds, including severance pay.
• Collective bargaining agreements and trade unions, which are mandatory in a number of industries.
• Occupational health and workplace safety requirements.

Relocation of the key team

Transferring Ukrainian specialists abroad requires a work permit for each employee being transferred, temporary or permanent residence status, and compliance with the destination country’s requirements regarding minimum qualifications or salary thresholds for obtaining a permit.

A number of EU countries have accelerated procedures for highly qualified specialists, including the EU Blue Card. However, even accelerated procedures can take weeks, so the process should begin well before the actual relocation.

Reviewing supplier and customer contracts

• Existing contracts may contain restrictions on changing the production location or require certification of a new facility before supplies can resume.
• Changing the jurisdiction of the invoicing entity may require contracts to be renegotiated or written consent from the customer to be obtained.
• Insurance coverage: policies issued in Ukraine may not provide sufficient coverage for risks associated with a new manufacturing facility abroad.

Protecting IP, technology and know-how

Relocating production to a new jurisdiction creates risks for intellectual property. Protective measures include:

• Make sure the trademark is registered in the destination country or protected through the Madrid Protocol system.
• Execute NDAs and IP Assignment Agreements with all local employees and contractors before granting them access to the technology.
• Document that know-how and technical documentation are transferred under a license agreement between the holding company and the operating company. This is important both for transfer pricing and IP protection.
• Consider storing critical technical documentation outside the operating company, for example with the holding company or an IP Holdco.

Key risks and what to check before relocation

Key risk map

Checklist of actions before the actual relocation of production

Strategy and preparation

• ☐ Relocation model defined (subsidiary, branch, contract manufacturing, JV).
• ☐ Comparative analysis of 3–5 jurisdictions conducted based on all key parameters.
• ☐ Consultation obtained from local legal counsel and a tax advisor in the destination country.
• ☐ CFC implications for the Ukrainian owner analyzed.

Legal formalities

• ☐ Optimal corporate structure selected, including a holding company.
• ☐ Corporate documents for registration prepared and apostilled.
• ☐ Company registration process in the destination country initiated.
• ☐ Bank account opened or the opening process initiated (EMI + traditional bank).

Permits and real estate

• ☐ Zoning and permitted use of the real estate verified.
• ☐ Due diligence of the property conducted: property register, encumbrances, environmental history.
• ☐ List of required permits and licenses identified and the application process initiated.
• ☐ Availability and cost of required utilities (electricity, gas, water) verified.

Customs and logistics

• ☐ Equipment classified under Ukrainian Classification of Goods for Foreign Economic Activity (UKTZED) codes and CN codes of the destination country.
• ☐ Export restrictions from Ukraine and import duties in the destination country verified.
• ☐ Equipment certification requirements (CE or otherwise) identified and the process initiated.
• ☐ Customs broker engaged in the destination country.

Personnel and IP

• ☐ Process of obtaining work permits and residence permits for key specialists initiated.
• ☐ NDAs and IP Assignment Agreements prepared for local employees.
• ☐ Trademark registered or an application for registration filed in the destination country.
• ☐ Existing customer and supplier contracts reviewed for restrictions on changing the production location.