In today’s society, an increasing number of people are deciding to work on a freelance basis or to build a small business of their own instead of taking on traditional employment. In Ukraine, the Private Entrepreneur (PE) business structure allows you to do business legally without incorporation of a legal entity and to enjoy very favorable taxation rules. This form of business registration is popular in Ukraine among self-employed people and freelancers, such as IT professionals.
In this post, we have compiled answers to the most frequently asked questions related to PE in Ukraine, which will help you to define whether PE is a suitable business structure for you.
Who is the PE business structure suitable for, and how is it different from a limited liability company (LLC)?
Private Entrepreneur is a good option for self-employed specialists and small businesses who want to enjoy a favorable tax regime and simplified reporting procedures and are engaged in non-risky business activities. This form of business is simple to register and maintain; additionally, it can offer tax savings through the Simplified Tax Regime that applies to such structures.
PE has become a widespread alternative to employment in Ukraine, as the taxes accrued on the income of Private Entrepreneur businesses through the Simplified Tax Scheme is much lower (5% or even less) than that accrued by salaried employees (roughly 40%). Its key drawback is the lack of limited liability. With a PE designation, the individual is personally responsible for any business liabilities; that’s not the case for an incorporated company, which is a separate legal entity in the form of LLC. So, while the PE business form is an excellent choice for individuals carrying on business activities that have minimal risks (IT professionals, independent consultants, etc.), this structure is not a suitable choice for businesses and startups that plan to grow big or that carry higher business risks and potential liabilities.
How is PE taxed?
A Private Entrepreneur can opt for one of the following two tax assessment schemes.
Under the Standard Tax Scheme, the standard taxes and tax rates apply on net profit, including net income tax (18%), military tax (1.5%), social security tax (22%) and VAT tax (if registered as a VAT-payer). This option can be beneficial if the PE has not only income but also significant associated costs, as the income tax rate applies only to net profit.
Under the Simplified Tax Scheme, the PE pays only one Unified Tax (instead of different types of taxes) at a rate that depends on the specific category to which the PE belongs. The Unified Tax rate is considerably lower than the Standard Tax rate, which can result in significant tax savings. However, to qualify, the PE has to satisfy certain conditions as to annual income.
Choosing the appropriate category under the Simplified Tax Scheme
Ukrainian law sets out four different categories under the Simplified Tax Scheme, each with its own requirements and taxation rules. When selecting the appropriate category, you should take into consideration the amount of annual income, type of business activity, and number of employees (if any) of the business.
A) The first category is for PEs that have no employees and annual income up to UAH 300,000. The PE is limited to selling goods at market or providing personal customer services to the population. The tax rate for this group is 10% of the “living wage” (minimum full-time income necessary to meet basic needs) as set on Jan. 1 of the reporting year.
B) The second category allows up to 10 employees, annual income up to UAH 1,500,000, and a broader range of business activities, including production/sale of goods, restaurant businesses, and services to individual customers or other PEs/companies. The tax rate is 20% from the monthly minimum wage, as set by the government on Jan. 1 of the reporting year.
C) The third category is limited only as to annual income, with a maximum of UAH 5,000,000. There are no limitations on the number of employees or type of business activity. The tax rate is 3% from gross income (providing the PE is registered as VAT-payer) and 5% from gross income in the case of non-VAT-payers.
D) The fourth category is for agricultural producers whose share of agricultural production equals or exceeds 75% of the total production. The tax rate depends on the type and size of the land plot used by the PE.
In addition, PEs in every category are obliged to pay social security contributions. The amount can be at their own discretion within a particular range. For 2019, the amount cannot be less than UAH 918.06 or more than UAH 13,770.9 per month (these minimum and maximum limits are set according to the current minimal wage in Ukraine).
While the first two categories are designed for retail businesses and the fourth for agricultural production businesses, the third is the most appropriate for IT specialists and other freelancers in Ukraine who sell goods or render services to companies.
Can foreign nationals be registered as a private entrepreneur in Ukraine on the Simplified Tax Scheme?
Yes, foreign individuals can be registered as Private Entrepreneurs in Ukraine and use the simplified tax regime, subject to the conditions mentioned earlier. It may be possible for such PEs to receive funds from their business activities in Ukraine as well as from overseas.
However, registration as a Private Entrepreneur cannot be used as grounds for obtaining a residence permit in Ukraine. Such permits are required if you want to reside in Ukraine for more than 90 days in every 180-day period. On the other hand, according to the Ukrainian Tax Code, a foreign national who registers as a private entrepreneur becomes a Ukrainian tax resident—which means he or she is obliged to pay taxes in Ukraine on his/her worldwide income, unless otherwise specified by a tax treaty with the other country or countries involved. What’s more, all receivables from business activity by a PE in Ukraine must pass through a business bank account opened with one of the Ukrainian banks. Therefore, before making a decision about PE status, foreign nationals should consider Ukrainian banking and currency-control rules, as well as the taxation rules of the country where they are permanent residents (if not Ukraine).
What is the procedure for PE registration?
A PE business structure must be registered in the State Registry of Legal Entities, Private Entrepreneurs and Public Formations. PE registration is free of charge and can be completed within 24 hours of filing the application (or on the next working day after application is made).
To register, you’ll need to complete an application form and provide a valid passport and tax code. If the application is made through an attorney, certified power of attorney is required.
A foreign national who wishes to register as a PE in Ukraine must first obtain a Ukrainian tax number and provide an address in Ukraine (a registered residential address or other address for communication with state authorities).
Registration of a PE with state statistics and tax authorities is automatic under the Standard Tax Scheme and requires no additional actions. But to register under the Simplified Tax Scheme you’ll need to file the proper application to the tax authorities. Alternatively, you can apply for the Simplified Tax Scheme and registration as a VAT-payer to the registrar at the same time you apply for PE registration.
Once registered, you’ll have online access to your PE registration information through the State Registry of Legal Entities, Private Entrepreneurs and Public Formations. Information on registration for the Simplified Tax Scheme can be seen online as well, through the website https://cabinet.sfs.gov.ua
Recent changes have allowed for PE registration to be done online. What’s your practical experience with online registrations?
Yes, at present, registration of a PE in Ukraine can be done online, through the website of Ukraine’s Ministry of Justice. However, to start the process, such an individual has to obtain an electronic digital signature, which can be obtained free of charge through the special electronic signature division of the tax authorities. But it’s not possible to get an electronic signature online, so you or your attorney will have to go to tax authorities in person for this purpose. Upon PE registration, you will be able to use such a signature for online reporting through Electronic Cabinet of taxpayers.
From our experience, online registration at present is very inefficient, unfortunately. The online registration platform remains in the test mode, which very often leads to system errors. As an example, you cannot expect timely registration (the 24-hour rule) or guaranteed parallel registration for the Simplified Tax Scheme (so, as a result, you may have to file an application for the Simplified Tax Scheme all over again, by visiting the local tax authority in person). We hope these issues will be fixed in the near future, to bring our business registration process in line with international standards.
Our firm, ContactUkraine LLC, has extensive expereince and will be pleased to advise and assist individuals who want to register as a PE in Ukraine.