Opening an IT Company in Ukraine
IT Outsourcing to Ukraine
Highly-qualified IT developers, moderate salaries, good English proficiency, innovative approach to development attract an increasing attention of foreign businesses and investors to Ukraine as a leading IT outsourcing destination in Eastern Europe.
Ukraine is home to the largest number of IT professionals in Europe and currently employs over 90,000 IT specialists, including 50,000 software developers. Approximately 30,000 IT students graduate from Ukrainian universities annually.
Presence of R&D and development centers by such global companies as Google, Microsoft, Samsung, Oracle, Transferwise, Boeing, eBay, Siemens, IBM, Huawei, and many others is a strong evidence of high quality of IT talent in Ukraine. Moreover, salary expectations of Ukrainian IT staff are considerably lower than in other European countries.
This article is meant for entrepreneurs and decisions makers of foreign companies who are thinking of opening an IT company in Ukraine or outsourcing their IT work to Ukraine. The article acts as a general guide to the most common questions when establishing an IT outsourcing operation in Ukraine.
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Specialization of Ukrainian IT Professionals
Ukraine ranks (in the world)
- 1st in the number of Unity3D game developers and C++ engineers
- 3rd in the number of Node.js, Python, ASP.NET, Ruby, Symfony, and PHP developers
- 5th in the number of front-end developers
There’s no shortage of Android app developers and iOS developers either.
Around 86% of all IT talent in Ukraine is concentrated in top 5 cities, namely:
Salary expectations of IT specialists vary depending on education, experience and area of expertise (ranging from $400 to $5000 in general). On average, salaries in Kyiv are 10-15% higher than in other IT hubs of Ukraine (for example, in Lviv and Kharkiv).
According to this research, the top universities for IT specialists include Kyiv Mohyla Academy, Kyiv Polytechnic Institute, Kyiv National Taras Shevchenko University, Lviv Polytechnic National University, Donetsk National University (now located in Vinnytsya), Kharkiv National University, and others.
The most popular websites in Ukraine for job search for IT professionals are jobs.dou.ua and rabota.ua. Other popular methods of finding suitable IT professionals is through LinkedIn, local IT Clusters and communities, regular IT events, and personal recommendations from people in the industry.
Structuring Your IT Outsourcing Operations
When deciding on how to establish your IT outsourcing operations in Ukraine, you have the following three most common choices:
- IT outsourcing to one of local companies in Ukraine (based on services agreement for contracted IT work with a local company)
- Hiring IT professionals directly by foreign company on a freelance basis (based on freelance services agreement with each freelancer)
- Opening a local IT company and hiring IT staff as a mix of salaried employees and freelancers
Each one of these options is described in more detail below to help you choose the option that suits you best.
Option: Outsource to a Local IT Company
In most cases, this option is ideal for short-term projects. You will not need to spend time and effort in hiring and managing your own IT staff and dealing with various regulatory and compliance laws. Your local outsourcing partner IT company will provide you with a ready staff and facilities based on the needs of your project that will help you get started and be productive from day one.
Although Ukraine has a very large number of such IT outsourcing companies ranging from small to large, your main challenge would be to find the right company that fits the software development maturity and skills required for your project and your budgetary constraints. This is often not an easy task and you often run the risk of hiring a wrong IT outsourcing partner thus risking the successful outcome of your project.
Option: Hire Freelancers Directly
Under this option, you (as a foreign company) will directly hire IT professionals in Ukraine on a freelancing basis under a freelance services agreement. This is a widely used option for getting IT work done in Ukraine because it offers good benefits to both foreign companies as well as local IT professionals. Specifically:
- To work as freelancers, individuals in Ukraine must register as Private Entrepreneurs (PE) in Ukraine (a simple business structure similar to Sole Proprietor in other countries). Interestingly, this structure offers an extremely favourable and simplified income tax rate of 5% to freelancers. This is in stark contrast to a very high tax burden of more than 40% (split between the employee and the employer) when working as a salaried employee.
- For foreign companie, not only it reduces their Ukrainian tax burden for hiring the local IT workforce, under this option, they also save costs associated with incorporating and maintaining a local company, setting up a local office, hiring administrative staff, dealing with the Ukrainian employment law, and so on.
Please note that even though registration and ongoing compliance procedures for private entrepreneurs are simple, as a rule, foreign companies hire a local professional service provider to assist with registration and regular reporting procedures for their freelancers.
You will need to send the salary of each freelancer directly from overseas to their special PE bank account (which is different from their regular personal bank account). If your freelancer staff is growing, for saving time and money for multiple international bank transfers, you may use settlement services of one of the local banks. They will generally charge a commission ranging from 0.5 to 1% for their settlement services. This process works as follows:
- The foreign company becomes a client of the Bank for the purpose of handling local multiple settlements;
- The Bank opens special “transit account” for handling transactions, related to such client;
- On a monthly basis, the foreign company sends in one installment funds to such transit account in the amount, which is sufficient to pay the salaries to its local staff together with a registry, containing information on the amount of salary of each freelancer and its bank details.
- Local bank sends money to each freelancer in the amount as described in the registry.
Option: Establish a local IT company
Under this option, you will open a limited liability company in Ukraine as a subsidiary of your parent foreign company, which will then hire IT professionals either as salaried employees based on labour agreement or based on a freelance agreement (in most cases, there will be a mix of such arrangements). This option can be good for long term projects in Ukraine when you are planning to establish an office and hire a large number of IT professionals.
As mentioned previously, the IT staff that you will hire based on freelancing agreement will be subjected to approximately 5% tax only. On the other hand, for staff that is hired as salaried employees, the company should assume roughly 40% tax overhead on top of the salary in-hand to the employee, namely:
- 18 % personal income tax (at the cost of gross income of employee);
- 1.5 % military tax (at the cost of gross income of employee);
- 22 % (at the cost of employer, i.e. on the top of gross income of each employee)
Most companies tend to reduce their costs by arranging staff as a mix of freelancers and full-time staff. However, such a structure requires careful tax and legal planning in order to avoid getting on the wrong side of the law and troubles with tax authorities.
Due to the weak political climate, lack of rule of law and enforcement of Intellectual Property Rights (IPR) legislation as well as still inefficient court system in Ukraine, in most cases foreign businesses tend to establish R&D centers only for the purpose of creating product, while parent company remains product ownership and retains majority of its profits outside Ukraine.
Here is a common practice when setting up an IT company in Ukraine:
- A foreign parent company opens a local limited liability company in Ukraine (LLC)
- LLC hires local IT professionals (a mix of freelancers and salaried employees)
- The foreign parent company signs a services agreement with its local subsidiary (LLC) with monthly payment in the amount, which is sufficient for local expenses.
- Every month parent company pays to its local subsidiary under the services agreement which allows the LLC to take care of its expenses including paying to the IT staff.
- The local LLC pays corporate tax on any profits that it made. Note that export of IT services is exempt from VAT in Ukraine;
Ukraine is a great place for outsourcing IT work due to the availability of highly skilled workforce at very moderate salaries. There are a number of different ways you can structure your IT outsourcing operations to Ukraine. After reading this article, you should have a good idea on which of the options will best suit your particular situation. We at ContactUkraine offer a wide range of consulting services in the areas of business set-up, outsourcing, regulatory compliance, taxation, and related fields. Feel free to contact us if you need assistance.
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