Options for running an IT business in Ukraine with preferential 5% taxes

Advantages of IT business registration in Ukraine

Convenience, distance, speed. In particular:

🔹 Fast and convenient business registration

Online sole proprietorship or LLC registration can be done within 10-20 minutes, offline – 24 hours. Of course, before that, it is necessary to prepare the required documents about the structure and determine the specifics of the activity.

🔹 Ease of opening a bank account

While in many countries of the world, opening an account is a real challenge. Ukraine provides a large selection of banking institutions, opening an account does not take much time, a high level of service, and 24/7 Internet banking.

🔹 Digitization – fewer papers, more electronic registers, electronic offices, electronic signatures.

🔹 Low tax rates compared to other jurisdictions.

Among these is a 5% tax on individuals’ income, dividends, or income. Each rate works in different taxation systems, so you should determine the optimal one for your business.

🔹 There are minimal business costs, such as rent and related accompanying services.

🔹 Profitable forms of cooperation with IT specialists (private entrepreneur, gig specialists, employees).

🔹 Diia City’s special regime for IT companies for 25 years.

The primary forms of ownership are Individual Entrepreneur or LLC

The choice is influenced by the following factors: independent business conduct or in partnership, the potential volume of income and expenses, counterparties (individuals or companies), the possibility of attracting investments, the level of responsibility (limited to a share or all of one’s property), the form of document management and accounting, and others.

Answering each point will allow you to choose the optimal form of conducting business in Ukraine. In the future, we will consider each form of ownership in more detail.

Individual entrepreneur in Ukraine

🔹 Activities of Individual Entrepreneur

A sole proprietorship carries out entrepreneurial activity alone. Individual Entrepreneur in Ukraine can be both a citizen of Ukraine and a foreigner. The entrepreneur is responsible for the obligations associated with such activities. A sole proprietorship may engage in any non-prohibited activity and may employ workers.

🔹 Taxes

There are two systems of taxation of the income of the Individual Entrepreneur.

The first is a simplified one, which provides for paying a single tax. The simplified system is divided into several groups of single taxpayers. Group 3 is suitable for IT representatives.

Single taxpayers of 3 groups:

– pay a tax of 5% without VAT or 3% with VAT, a preferential rate of 2% during the war;

– permissible income up to 7,818,900 UAH/year (~190,000 – 195,000 EUR);

– can employ an unlimited number of employees or conduct activities without them.

The second system of taxation is general (18% income tax, 1.5% military levy). Although tax rates are higher in the public system, there are advantages – there are no restrictions on the types of activities, the choice of the counterparty, the number of employees, and the amount of income.

A single social contribution (SSC) of UAH 1,474/month (~35-40 EUR) is additionally paid in both taxation systems. But during martial law, there are preferential conditions, and you can not pay.

Foreigners can be on both the general and the simplified system. Because after registration, Individual Entrepreneur are considered residents of Ukraine.

🔹Advantages of Individual Entrepreneur

Registering and liquidating is easy and quick, a “simplified” form of accounting and document management. Disadvantages – the Individual Entrepreneur is responsible for its obligations with all its property (if debt collection or litigation).

The Individual Entrepreneur is “convenient” for those just starting to operate, with an income of up to UAH 7,800,000 million and small expenses.

Limited liability company (LLC)

🔹 The founders

LLC can be founded by one or several persons. Their number is not limited, but usually 1-3 persons.

LLC founders can be both natural persons (citizens of Ukraine and foreigners) and Ukrainian and foreign companies. You can be a founder of several LLCs at the same time.

Foreigners must obtain an individual tax number (TIN) before registering an LLC.

Also, a foreigner who registered an LLC in Ukraine or was employed as an employee has grounds for legalization in Ukraine (obtaining a residence permit).

🔹Corporate contract

A corporate agreement can be signed to regulate the relationship between the founders (participants). In which to provide for decision-making, payment of dividends, sale of shares in LLC, issues of intellectual property, and distribution of property and assets.

🔹Regulations

It can be called the main document of the LLC, which is developed individually for each company and its field of activity. The charter contains both mandatory provisions: the name of the LLC, management bodies, their competence, the procedure for joining the LLC and leaving it, accounting for the shares of the LLC in the share accounting system, as well as other conditions agreed between the founders (restriction of the powers of the director, payment of dividends and other ).

🔹Dividends

The founders have the right to receive dividends from the net profit of the LLC. Rewards for individuals are subject to income tax (5% or 9%) and military levy (1.5%).

Dividends of legal entity founders are also subject to taxes. Their amount depends on the LLC taxation system and the recipient of rewards.

🔹 Taxation of the income of the LLC

Two taxation systems to choose from:

• general system (income tax 18%);
• a simplified system (a single tax of 3% or 5%, a preferential rate of 2% during the war).

A value-added tax (VAT) of 20% may be charged in both cases.

The main differences between the general and simplified taxation systems are that, in the simplified method, tax is paid from turnover, and in the public system – from net profit.

🔹 Diia.City 

It became operational in 2022, and its terms are fixed for at least 25 years. As of August 2023, according to the registry data, Diia City has more than 600 residents. Applications for the acquisition of resident status are considered by the Ministry of Statistics.

LLC in the IT sphere can join Diia City and get several advantages:

– income tax of 9% or 18%;

– dividend tax of 5%, which is not paid under certain conditions;

– various models of cooperation (contracts with Individual Entrepreneur, labor contracts, gig contracts);

– gig contracts with foreigners and stateless persons;

– NDA, NCA contracts.

🔹Advantages of LLC

Limited liability within the founder’s share of the LLC and, accordingly, within the authorized capital, the opportunity to attract investors and partners to become a resident of Diia City.

So, those who want to start a business with a partner, consider attracting investments, have a planned profit of more than UAH 7 million, need company status, or wish to join Diia City should consider registering an LLC.

How to prepare for the registration of a sole proprietorship/LLC

First, check the documents certifying the identity of the Individual Entrepreneur or the founders/director of the LLC. This is a passport or residence permit and TIN. If there are no documents or their validity period has expired, get new ones. This especially applies to the TIN for foreigners.

Secondly, decide on the types of activities, the taxation system (for Individual Entrepreneur/LLC), the name, address, who will be the founders, director, and beneficiary (for LLC).

The next stage of legal work is verifying documents and coordinating data for registration. The preparation of registration documents (statements, statutes, decisions or minutes, etc.) and communication with state bodies notaries also belong to the competence of lawyers. The participation of the future Individual Entrepreneur or founders of the LLC is required once – to sign a power of attorney or to sign registration documents personally.

Conclusions

So, the most widespread from the view of registration and support are such forms of doing business in Ukraine as Individual Entrepreneur and LLC.

Why non-residents choose Ukraine – due to relatively low tax rates, quick business registration, and the possibility of legalization (obtaining a residence permit in Ukraine).

We recommend that you consult with a lawyer before registering a Individual Entrepreneur or LLC, who will help you choose the best option for conducting business and accompany you at the start and in the business process.