Choosing a Business Structure in Ukraine
Types of Legal Entities
The purpose of this article is to provide an overview of most commonly used legal forms of business in Ukraine. For individuals, the most common forms of business incorporation in Ukraine consist of either registration as Private Entrepreneur or incorporation of a Limited Liability Company. For companies, the most common forms of business incorporation in Ukraine consist of Limited Liability Company (Subsidiary Company), Joint Stock Company (either private or public), Joint Venture or Representative Office.
The sections below provide a comparative overview of these business structures to help you decide on the structure that’s appropriate for your particular needs. Note that business structures that are of non-profit nature or unique to specific industries (such as farm enterprise) are outside the scope of this article.
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Multiple statues regulate formation of legal entities in Ukraine
Ukraine’s legal system is based on civil law which is mainly influenced by the French civil code, Roman Law, and traditional Ukrainian customary law. Formation and regulation of business entities in Ukraine are covered under the Civil Code of Ukraine, the Commercial Code of Ukraine, Law of Ukraine “On Business Companies”, Law of Ukraine “On State Registration of Legal Entities, Private Entrepreneurs and Public Formations”, and a few other laws devoted to specific business structures.
According to the World Bank Report 2018, among 190 countries, Ukraine ranks only #76 on Ease of Doing Business and #52 on the Ease of Starting a Business . The laws in Ukraine are often complex, conflicting and confusing. Over the last years, constant efforts are being made to simplify the legal and regulatory regime in Ukraine (for example, compared to the previous year Ukraine went 4 steps forward in the Ease of Doing Business criteria). However, given the complex political situation at present, this is rather a slow and bureaucratic process. Therefore it’s important to seek proper legal advice before choosing a business structure that best suits your particular business needs.
How to choose the right business structure?
There are a number of factors that must be taken into consideration when choosing a business structure in any jurisdiction. The key among them include:
- Ease of incorporation: Complexity of incorporation and approvals procedure, required documents, timeline, and other bureaucratic hurdles
- Capital: Minimum required capital, ease of capital injection, ease of repatriation
- Liability: Extent of liability protection against business risks
- Taxation: Overall tax burden including income tax, capitals gains tax, dividend tax, employment tax, and other types of taxes
- Compliance and Reporting: The complexity of ongoing compliance and reporting requirements is a very critical factor in choosing a business structure that is appropriate for the size and complexity of your business.
- Currency controls: Extent of controls on the repatriation of profits, capital, and loan repayments out of the country, controls on injection of capital or loans from overseas
- Restrictions on doing business: Any restrictions imposed on doing business
- Relocation of foreign staff: Ease of foreign staff relocation and approval of their work permits
- Closing of business: Ease of closing or selling the business entity
It’s important to examine the various forms of business structures along with their advantages and disadvantages in the target jurisdiction. Below you can find information on key characteristics of business structures in Ukraine which will help you to choose the right legal structure for your business. Note that certain types of businesses require establishing a certain type of business structure only (e.g. banks can be opened only as public joint stock companies or as cooperative banks).
Limited Liability Company
Ideal choice for Small to Mid-Size Businesses
As in most other jurisdictions, a Limited Liability Company – LLC (in Ukrainian – Товариство з обмеженою відповідальністю or simply “ТОВ”) is a legal entity in which the liability of the members/shareholders is limited to what they have invested in the company and their personal assets are protected from business liabilities. A Limited Liability Company is one of the most universal and popular types of business entities in the world including Ukraine. Such companies vary in size and scope from a one-man consulting company all the way up to a diversified multinational conglomerate such as Google.
Both individuals as well as companies can register a LLC in Ukraine. A unique feature of the Ukrainian Limited Liability Company structure is that share capital is divided into parts and not in number of shares. Each member owns a part of the company as prescribed in the statutory document of LLC (charter).
Key Characteristics of LLC
- Registration. Company registration in Ukraine is a fairly straightforward process and can be accomplished in 1-2 days.
- Ongoing Compliance. Ongoing compliance and reporting requirements for LLCs are more simple and less regulated by law than those of other business structures, e.g. joint stock company.
- Limited Liability. Owners’ (shareholders’) liability is limited to the amount of their investment in the company.
- Shareholders. LLC must have a minimum of 1 and a maximum of 100 shareholders. The shareholders can be individuals or corporate entities and either local or foreign individuals/entity. Shareholders are members of the highest body of LLC – the General Shareholders’ Meeting (hereinafter – the GSM)
- Directors. Directors can be one or more individuals (can be either local or foreign individuals, the latter has to obtain work permit and temporary residence permit). Corporate directors are not permitted. Directors are appointed by the GSM and have to be in labor relations with LLC.
- Audit Commission. Controlling body of the LLC, which performs supervisory control over director’s activity and approves annual financial reporting. According to Ukrainian law Audit Commission has to be appointed by the GSM among shareholders of LLC in the amount of 3 members. Accordingly, the Audit Commission can be created only if LLC has three or more shareholders.
- Company Secretary. Appointment of a Company Secretary is not required.
- Registered Address. Each company must have a local registered address in Ukraine which acts as the place of office, management of the company and from where company conducts its activities.
- Share Capital. No minimum share capital required.
- Registration Cost and Timeline. Government registration of a LLC is free of cost and the registration can be completed in 1 working day.
- Governance. LLC is governed by the following bodies:
- General meeting of shareholders (“GMS”) – the main decision-making body which has powers to resolve all issues
- Board of directors or Director as elected by the GMS.
- Audit Commission (if any)
- Transfer of Shares. Shares can be freely transferred subject to the priority rights as described in the company charter. LLC requires that all shareholders be listed in the company charter. Therefore any change in shareholders requires amendment to the company charter.
- Taxation. LLCs are taxed at standard corporate tax rates in Ukraine. In general, taxation and tax benefits in Ukraine depend on company size, annual turnover and type of business activity.
- Accounting. LLCs like any other type of business entity must maintain proper accounting records using either national or international IFRS standards of accounting.
Best Suited For:
Compared to other forms of legal entities in Ukraine, a LLC strikes the best balance between complexity, flexibility, and scalability. It offers the full liability protection to business owners (i.e. their personal assets are protected from business liabilities) and the flexibility to grow big as your business expands, yet at the same time exhibits simpler scrutiny and compliance requirements by government.
Therefore most small to mid-size businesses (local and foreign) prefer to incorporate a LLC in Ukraine. In fact, a LLC is the most popular type of legal entity formation in Ukraine.
Joint Stock Company
Suitable for large companies only
Unlike a LLC, a Joint Stock Company (JSC) (in Ukrainian – Акціонерне товариство or АТ) is a type of legal entity that is entitled to issue shares. In many other jurisdictions, this type of company is also known as a Company Limited by Shares. The shares must be registered with the National Securities and Exchange Commission (“Securities Commission”). The compliance and reporting requirements for a JSC are significantly more complex and onerous and therefore it’s only suited for large companies.
JSC may be either a public limited liability company (when its shares are traded to public privately or publicly at stock exchange) or a private limited liability company (when its shares are held privately).
Key Characteristics of JSC
- Registration. The registration process for a JSC is considerably more complex because a JSC has to fulfill a number of legislative pre-registration requirements including:
- registration of issue of shares with the Securities Commission
- obtainment temporary certificate on registration of securities issue
- assignment of the International Securities Identification Number (ISIN) to shares (stocks),
- conclusion of an agreement on service of the securities issue with a Central Depository
- independent appraisal of contributions of shareholders to charter capital (if payment is made by property, not cash)
- payment of charter capital by JSC’s shareholders in full etc.
- Compliance & Reporting. JSC type company is more heavily regulated by Ukrainian law, including regulations on protection of rights of minority shareholders (e.g. cases when JSC or shareholder, who is acquiring controlling share in JSC, are obliged to purchase shares of other shareholders on their demand), complex procedures of change to shareholding, number and cast of governing bodies, disclosure of wide scope of information on JSC. In addition, for Public Joint Stock Company there are various requirements for publication of financial statements, annual external audit, special procedure of election of governing bodies and their cast etc.
- Limited Liability. Same as LLC. JSC is a company where shareholders are liable for the company’s commitments only within the limits of their share capital and are not personally liable for the company’s debts.
- Shareholders. All Joint Stock Companies must have a minimum of one shareholder with no limit on the maximum number of shareholders.
- Directors. Same as LLC. Directors are appointed by shareholders via a general meeting of shareholders (GSM) or the supervisory board (see Governance below) in accordance with charter of the JSC.
- Company Secretary. Appointment of a Company Secretary is not required, but according to the law. Supervisory Board may appoint Corporate Secretary – a private individual, who is responsible for support of interactions between JSC and its shareholders/investors.
- Registered Address. Same as LLC.
- Share Capital. Different than LLC. Share capital cannot be less than the equivalent of 1,250 minimum salaries, based on the rate effective at the moment the company is establishment and must be fully paid by shareholders before registration of the JSC. As of 1st of May, 2016, the minimum authorized capital of JSC cannot be less than UAH 1,812,500. Additional share capital can be injected anytime by following the appropriate procedures.
- Shares and Other Securities. Unlike LLC, JSC may issue ordinary and privileged shares, however privileged shares may not be more than 25%. Privileged shares usually give more rights in terms of receiving income but less voting rights; privileged shares may have several classes as described in charter of JSC. JSC may issue other securities, e.g. bonds.
- Reserve Capital. JSC is required to form reserve capital in the amount of 15% of its paid-up capital. Reserve capital is formed gradually by annual installments in the amount not less than 5 % of annual net profit of the JSC.
- Governance. Similar to LLC but with some exceptions. JSC is governed by the following bodies:
- General Meeting of Shareholders (“GMS”) – the main decision-making body which has powers to resolve all issues. GMS has exclusive power to approve deals in the amount exceeding 25% of assets of the JSC and others. According to the law, GSM has to be hold within city/town/village where JSC has its registered address; the only exception is when at the date of calling for the GSM, 100% of shareholders are foreign investors.
- The Supervisory Board is appointed by GSM and can be composed out of at least 5 private individuals who are either shareholders/their representatives or independent directors. Law of Ukraine “On Joint Stock Companies” provides number of requirements for independent directors so that to secure their independence nature from illegal influence from shareholders and members of executive body (Board of Directors). The Supervisory Board is mandatory if the number of shareholders exceeds 10. The board supervises activities of the Board of Directors / Director. According to law, the Supervisory Board of Public Joint Stock Companies has to include at least two independent directors and has to appoint number of internal committees as described by law.
- Executive body (Board of Directors or Director) is appointed by Supervisory Board (if according to the charter appointment of Executive body is not in the competence of the GSM) and is responsible for day-to-day operations of JSC. According to law, executive body has all powers, except those which by law or charter of the JSC constitutes competence of GSM or the Supervisory Board. Exact number of executive body members and its competence are defined by the charter of the company or other internal regulation. The executive body can consist only of private individuals (corporate directors are not allowed). There is no requirement for director to be a shareholder of the company.
- Audit Commission. The controlling body of JSC which exercises supervision over the Supervisory Board and the Executive body of the JSC and performs annual financial audit. Members of the Audit Commission are appointed by the GSM.
- Transfer of Shares. Different than LLC.
- Unlike LLC, for transfer of shares there is no need to amend charter of the company (as shareholders are not listed in the company charter for AT type company), but transfer is proved by securities account statement.
- Note that acquiring substantial (10% and more) and 50 % (and more) share in the charter capital requires shareholder to comply with number of procedures, aiming to protect rights of minority shareholders, namely: in case purchase of shares will result in acquiring by shareholder of 10 % (and more)e of charter capital of JSC, such shareholder is obliged to notify the JSC on such purchase as well as publish such information with the Securities Commission; in case of purchase of 50 % and more shares, such shareholder has to suggest other shareholders to buy their shares at market price.
- Taxation. Same as LLC.
- Accounting Standards. Public Joint Stock Companies must use IFRS standards of accounting whereas private Joint Stock Companies can choose between national or international IFRS standards (with some exceptions stipulated by law).
- Audit of Accounts. For public JSC companies, annual financial reports are subject to an external independent audit; for Private Joint Stock Companies audit is not mandatory, except number of cases, stipulated by law (including when JSC is owned by foreign investor for 10 % or more)
Best Suited For
For a JSC, the initial registration procedure and ongoing regulatory requirements are significantly more onerous and complex than for LLC type of companies. Therefore an JSC type legal entity is suitable only for large business entities. Note that a LLC can be converted to JSC at any stage subject to following the respective legislative procedure of re-organization.
Representative Office and Branch Office
Applicable to foreign companies only
In addition to establishing a local company (a LLC or a JSC), a foreign company can also set up a
- Representative Office (RO). A RO does not engage in commercial activities and its only purpose is to conduct market research and other non-transactional operations. Registration of a RO makes sense in situations where the foreign company is not yet ready to commence business activities but wants to explore market and business environment in Ukraine.
- Permanent Establishment which is often also called as Branch Office. A Branch Office can engage in commercial activities but it must register with tax authorities.
Key Features (apply to both RO and Branch Office)
- Both are treated as an extension office of the foreign company, located in Ukraine to represent the foreign company and secure its interests on the territory of Ukraine. As such, they are not a separate legal entity and their liabilities extend to the parent company.
- Both have to be registered with the Ministry of Economic Development and Trade of Ukraine for a government fee of $ 2500. As a proof of registration, the RO will get a certificate of registration of the RO and information on the registration is included to the Registry of Representative Offices. Registration is made within 60 working days upon payment of registration fee.
- Both can open accounts in Ukraine, however there are certain regulations on the use and operations of such accounts.
- Both are not treated as a separate legal entity and they operate on behalf of the foreign head office (parent company). The head office assumes all rights and obligations and bears the liability for the actions of both RO and Branch Office.
- Their activities are governed by the provisions of the power of attorney issued by the main (parent) company which is listed in the certificate of registration. Both RO and Branch Office act on behalf of the parent company and its interests.
- Both operate strictly in accordance with the rules and requirements of Ukrainian legislation.
- Management in both cases is governed by the authority of the main (parent) company.
- Since both a Representative Office and a Branch Office always operate on behalf of the head office (parent company), you can use name and reputation (Goodwill) of the parent company which can play an important role in certain situations;
- The foreign employees do not need to obtain work permits, they can work on the basis of ID card. The procedure of obtaining of the ID card is more simple and fast – ID cards are issued within 15 days for the period up to 3 years, whereas work permits, necessary for the employment of foreign employees’ other than employees’ of RO and Branch Office, are issues only for one year and with a more complex procedure. ID cards allow foreign employees to obtain temporary residence permit in Ukraine.
Best Suited For
Setting up a Representative or Branch Office may make sense in certain situations however in vast majority of the cases, incorporating a local Limited Liability Company is the most preferred and popular option.
JOINT VENTURE (JV)
A Partnership type of business structure
A foreign investor is granted the right to enter into a joint venture with a Ukrainian partner (in Ukrainian – Договір про Спільну Діяльність), formally referred to as “a joint activity agreement”. Joint Venture is not a legal entity but joint activity of two parties with the purpose of getting profit or achieving other goal. Joint venture can be with or without assigning property by its parties. If parties assign property, such Joint Venture is called Simple Partnership (in Ukrainian – Просте Товариство).
- The parties (partners) can conduct joint activity without establishment of a legal entity in order to receive profit or to achieve a certain goal
- Profit and risks from the activity of JV are distributed between the partners of JV in accordance with JV agreement
- JV can be created for both limited and unlimited period of time
- JV agreement shall define terms and conditions of mutual business activity of parties, legal status of assigned property, procedure of loss recovering, procedure of distribution of profit and other conditions.
- Parties to JV are fully liable for JV’s debts
- JV with foreign investor is subject to registration with local state authorities of Ukraine for a small registration fee.
- Party, responsible for accounting of JV’s activity, has to keep separate accounting of JV’s activity results and prepares separate financial reporting
- Profit, received by each party from JV activity in accordance with the financial report, is included to income of each party of JV for the purposes of taxation
- JV have to be registered with tax authorities as VAT tax-payer in case activity of JV is subject to VAT
- Payments under the activity of JV can be made through separate bank account opened for the activity of the JV
- Activity of JV, which is acting without assigning of property to JV, is mostly regulated by JV agreement. On the other hand, JV with assigning of property (so called Simple Partnership, in Ukrainian – Просте Товариство) has the following additional regulations:
- Simple Partnership can be created for limited or unlimited period
- Parties to the simple JV, created for unlimited period of lime, can withdraw from the simple JV with prior 3 months notification
- Party to the simple JV can withdraw from the simple JV, created for designated (limited) period of lime, only on “reasonable grounds” and shall be obliged to refund to the other party real losses, caused by such termination
- Property, assigned for the benefit of JV, becomes joint property (if otherwise is not prescribed by JV agreement)
- Business activity is subject to regulation by JV agreement
- Parties to the Simple Partnership are liable for its debts with all their property
Production Share Agreement – A Special Type of JV
There is a specific kind of JV agreement – a production share agreement (PSA). A PSA concerns assignment of rights to investors as to mining and development of natural resources, carrying out of business activity connected with the usage of the state owned items which according to law cannot be given to private ownership. This kind of agreement is concluded between investor (who can be both Ukrainian and foreign investor) and the Cabinet of Ministers of Ukraine on behalf of the state. One of the parties of PSA is always a state owned company. There can be two or more parties of PSA. Legislation on PSA includes a lot of guarantees and tax benefits for the foreign investor. There is often a special legislation that is adopted for the purpose of realization of a specific PSA.
Best Suited For:
Joint Venture is not a legal entity, so its parties bear full responsibility for JV’s debts. JV can be reasonable form of business structure when parties are willing to realize specific project or plan to cooperate in some specific area, whereas for long-term operations and doing business, it’s highly advisable to incorporate a separate legal entity like a Limited Liability Company.
A Sole-Proprietorship type of business entity
Private individuals who are engaged in non-risky type business activities will find Private Entrepreneur type of business registration a good option for their simple needs. The form of business is simple to register and maintain and additionally, can offer significant tax savings through the Simplified Tax Regime for such structure.
Foreign citizens can also be registered as Private Entrepreneurs in Ukraine and use the Simplified Tax Regime according to Ukrainian law (subject to number of legislative conditions as defined by Tax code of Ukraine). For registration as a Private Entrepreneur, the foreign individual has to obtain tax number and an address (where he/she is registered) on the territory of Ukraine. Note that registration of Private Entrepreneur cannot be used as grounds to obtain temporary residence permit in Ukraine.
Key Features of Private Entrepreneur
An individual who is registered as a Private Entrepreneur:
- is a natural person (not legal entity) who is willing to conduct solely business activity and has registered in the Companies Register as private entrepreneur;
- bears full personal responsibility for all business risks;
- can open bank accounts as Private Entrepreneur, conduct business activity and hire employees;
- in case of insolvency (like legal entity), Private Entrepreneur can be recognized bankrupt.
- in case Private Entrepreneur has income up to 5 million UAH per year, it can (upon application) enjoy so called “Simplified Tax Regime” (with very favorable tax rates – up to 5 % of the income).
There are number of disadvantages of Private Entrepreneur type of business form including:
- The owner personally takes on all the debts and obligations related to his business activity.
- For business partners of Private Entrepreneur who is using Simplified Tax Regime, there are negative tax aspects related to VAT refund.
- Your business will have a poor perception among customers, suppliers, bankers, and staff.
- Your business has no perpetual existence. It lives or dies with you.
- It will not be easy to sell such kind of business.
- According to Ukrainian law, all property achieved during marriage constitutes joint property of a couple. Disposal of joint property can be done upon mutual consent of owners. As property of Private Entrepreneur is equal to property of a natural person, it is necessary to make sure that the owner has obtained his wife’s/ her husband’s consent for disposal of property.
Best Suited For
Self-employed specialists and small businesses who want to enjoy favorable tax regime, simplified reporting procedure, and are engaged in non-risky business activities are ideally suited to register as Private Entrepreneurs. This form of business registration is very popular in Ukraine among self-employed people and freelancers such as IT professionals.
Nowadays in Ukraine many companies who are hiring highly-paid professionals (e.g. especially in IT area) tend to conclude civil services agreements instead of employment agreements. This allows to significantly decrease tax burdens on worker’s income, namely:
- currently employee’s income tax is 19,5 % whereas workers on simplified tax regime will pay only 5 % on their income providing their income does not exceed 5 million UAH per year;
- additionally, social securities tax is much lower for Private Entrepreneurs on Simplified Tax Regime, whereas companies are obliged to pay 22 % of salary as social securities tax from the salary of each employee.
Which form of business structure is right one for your business depends on the type of your business, number of owners it has, its growth plans, and the level of business risks. For small to medium size businesses (which is majority of the businesses in Ukraine) including new startups, the most suitable type of incorporation entity is a limited limited company that offers scalable growth and liability protection for shareholders without adding too much compliance complexity.
Here are some additional resources about setting up a legal structure in Ukraine that you might find useful :
- Limited Liability Company – Registration Guide
- Private Entrepreneur – Registration Guide
- Ukraine Tax Guide
If you need assistance with setting up your business in Ukraine, please contact us.
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