In today’s world of digitalization and globalization, the role of independent entrepreneurs, especially in the IT sector, is becoming increasingly relevant. In this article, we will explore complex issues related to registration, cessation of activity, and aspects of tax residency for individual entrepreneurs in the IT sector.
The second method is online via the Diia state service portal, where the registration is processed automatically. Thus, the private entrepreneur will be entered into the state register immediately after submitting the application for registration. Subsequently, an extract will be delivered to your personal account. The advantage of registering through Diia is speed and convenience, as it only takes about 10-15 minutes without any prior appointment or waiting in line. The critical requirement is a valid electronic digital signature.
In both cases, the opening of a private entrepreneur occurs at the residence. This is a free service, and no administrative fee is charged.
The registration extract can be considered the primary document confirming the private entrepreneur registration and contains essential information (tax identification number, address, types of activities, contact details, etc.). This document can be presented to counterparties, state authorities, and other institutions or organizations (banks, electronic digital signature issuance services, etc.).
How to Prepare for Registration
Choosing a taxation system is crucial, and it can either be a general or a simplified system.
An application for choosing a taxation system can be submitted along with the registration application. Therefore, there is no need to visit the tax office.
Let’s discuss the features of each system.
General Taxation System:
18% personal income tax and 1.5% military levy;
22% single social contribution;
20% value-added tax if the turnover exceeds 1,000,000 UAH in 12 calendar months;
The taxable object is net income (the difference between total income and expenses);
There is no income limit;
No restrictions on the types of activities;
No restrictions on the number of employees (under an employment contract);
Any counterparty can be chosen (regardless of their taxation system and residency status).
Simplified Taxation System (Group 2):
Annual income limit for 2024 is up to 5,921,400 UAH;
Flat tax of 1420 UAH per month;
Single social contribution of 1760 UAH per month;
Private entrepreneurs can only provide services to individuals or other taxpayers on the simplified system (i.e., private entrepreneurs or companies on the simplified system), services to non-residents — foreign private entrepreneurs or companies are prohibited;
No more than 10 employees are allowed;
Becomes a taxpayer from the first day of the month following the month in which registration occurred.
Simplified Taxation System (Group 3):
Annual income limit for 2024 is up to 8,285,700 UAH;
Flat tax — 5% of income (paid quarterly) or 3% of income + 20% VAT;
Single social contribution of 1760 UAH per month;
Private entrepreneurs are not restricted on whom to provide services, meaning the counterparty, client, or customer can be individuals, companies, and private entrepreneurs on any taxation system, including non-residents;
No restrictions on the number of employees;
Becomes a taxpayer from the date of state registration.
There is a nuance—private entrepreneurs have the right not to pay the ЄСВ for themselves during the period of martial law and for 12 months following its cancellation. This regulation is provided by law. However, during this period, no insurance experience is accrued.
The general taxation system is typically chosen if the annual income exceeds 8,285,700 UAH and there are significant operational expenses (such as for hardware and software).
The second group of the simplified taxation system could be considered if your counterparties are individuals or Ukrainian companies or private entrepreneurs who are payers of the flat tax, and your income does not exceed 5,921,400 UAH.
For IT private entrepreneurs, the simplified taxation system, particularly the 3rd group (5% flat tax), is generally recommended. This is because a significant portion of IT entrepreneurs provides services to foreign clients, and the 3rd group allows providing services to any counterparties, including non-residents. Therefore, if your income is no more than 8,285,700 UAH, and you have contracts with non-resident clients, the 3rd group would be suitable.
Important Considerations When Choosing a Simplified Tax System (whether 2nd or 3rd group):
Firstly, check for any tax debts (related to personal income tax, property tax, or any other taxes); this can be done in the Electronic Cabinet of the taxpayer, the Unified Register of Debtors, or by conducting a tax audit directly at the tax office.
Secondly, verify which country you are a tax resident of.
This is crucial because you cannot be a payer of the flat tax if you have tax debts or if you are a non-resident of Ukraine. In such cases, the tax service will deny registration as a payer of the flat tax for the 2nd or 3rd groups. Consequently, the private entrepreneur will be on the general taxation system for some time.
After eliminating the reasons for denial (paying off the debt, confirming the status of a Ukrainian resident), you can reapply no later than 15 calendar days before the start of the next calendar quarter.
In summary—it’s advisable to prepare in advance for choosing a taxation system, specifically to check which system suits you, whether you meet its requirements, and whether there are any reasons for denial in choosing a simplified system.
Furthermore, it is essential to adhere to the requirements of the simplified taxation system since exceeding the annual income limit, engaging in activities not specified in the register of flat tax payers, and other violations have specific consequences, such as the application of a 15% flat tax rate and a transition to the general taxation system.
You can check the taxation system of your private entrepreneur or a counterparty in the Electronic Cabinet of the taxpayer in the relevant registers.
Selection of Types of Activities
For the IT sector, the following classification of economic activities can be chosen:
62.01 Computer programming;
62.02 Consulting on informatization;
62.03 Management activities of computer equipment;
62.09 Other activities in the field of information technology and computer systems;
63.11 Data processing, hosting information on web servers and related activities;
63.12 Web portals;
63.99 Provision of other information services, n.e.c. (not elsewhere classified);
58.29 Publishing of other software;
58.21 Publishing of computer games;
70.22 Consulting on commercial activities and management.
The classification of economic activities suitable for you depend on the directions and specifics of your activities. It is mandatory to choose one primary type of activity and other additional ones, with no limit on the number, but typically, this is up to 5-10 classification of economic activities.
Termination of a Private Entrepreneur
Entrepreneurial activity can be terminated offline by visiting a registrar or notary (the private entrepreneur will be terminated within 24 hours) or through the Diia portal (termination will occur automatically immediately).
The confirmation of the ФОП’s termination will be a “terminated” entry in the register.
Overall, the procedure for terminating a ФОП is not limited to just deregistration. If you have decided to cease operations, you need to:
Submit the final “liquidation” report;
Pay all taxes and the single social contribution;
Undergo a tax audit to ensure there are no debts;
Close the bank accounts of the private entrepreneur.
Tax Audit
After ceasing entrepreneurial activities, the individual continues to be registered at the tax office as a taxpayer who received income from them.
Tax authorities may initiate and conduct a tax audit on their initiative or upon your request.
It is recommended to prepare and voluntarily approach the tax office to undergo the audit and resolve all issues related to the private entrepreneur (including paying any fines if necessary).
Preparation involves gathering documents related to the private entrepreneur’s activities. These could be contracts, agreements, invoices, receipts, acts of acceptance-transfer, certificates of closing bank accounts, statements of account transactions, tax reporting, etc. The tax inspector requests a specific list of documents based on the specifics of your activity.
Generally, the audit covers 1095 days (3 years), meaning the three years of activity before the private entrepreneur’s termination date are subject to audit. However, due to quarantine and the introduction of martial law, the terms were suspended from March 18, 2020, to July 31, 2023. Therefore, the audit may consider the last three years and previous periods.
Moreover, the 1095-day limit does not apply to single social security tax. Thus, arrears, fines, or penalties can be assessed and collected for any period.
The tax authorities determine the final period of the audit.
Tax Residency
Registration as a private entrepreneur is one of the criteria for the status of a tax resident of Ukraine. This criterion can be used to confirm Ukrainian tax residency. For example, it can be used abroad to prove a connection to Ukraine, particularly in matters of avoiding double taxation.
Conversely, if moving abroad permanently, acquiring citizenship, and wishing to be considered a resident of only one country, it is recommended to reduce or eliminate compliance with the criteria of the other country (such as liquidating the private entrepreneur , undergoing a tax audit, etc.).
The issue of tax residency should be considered and assessed comprehensively. In addition to private entrepreneur status, other criteria are taken into account (place of residence, center of vital interests, duration of stay, etc.).
Conclusions
Although the registration and liquidation of a private entrepreneur may seem straightforward, thanks to online services, it is essential to be aware of many nuances. Understanding the requirements for taxation, rules, and potential risks is crucial. Knowledge of these aspects will help avoid unpleasant surprises and ensure the successful management of your IT business.
