The IT sphere has become one of the most promising in Ukraine in the last decade. Primarily, it concerns export-oriented outsourcing segment. Many Ukrainian IT-companies and freelance programmers work on projects for foreign clients who, in their turn, release software product as their own brand.
The case described below is based on the example of foreign companies that take decision to cooperate with freelance programmers in Ukraine. All the issues that may arise in the process of execution of contracts about such cooperation are discussed in detail.
Which option to choose: to cooperate with sole proprietors (entrepreneurs) or to register a company in Ukraine
Option 1 is setting up a local IT-company and employing staff. It is the best option if you intend to participate in tenders to win big contracts and you have big clients.
This option is also suitable if your business is well-established, you have a big office with a lot of employees (more than 10), and each of them has their own work station.
However, there are considerable disadvantages. Firstly, you will face higher standards of HR records execution and management, the necessity of comprehensive accounting and bookkeeping reporting. One more thing to be taken into account is that as soon as the number of employees you hire reaches 8 people, you have to arrange the workplace to employ one disabled person. In case you don’t fulfill this quota, you will have to pay the fine, which may be equal to the average annual wage rate established for your company for every workplace for a disabled person you have not created. All these create additional business support costs.
Option 2 consists in hiring freelance IT-specialists directly by a foreign company (on the basis of freelance contract with every freelancer). Such option will be the most suitable if you work with no more than 10 freelancers, they are registered IE (individual entrepreneurs) on the single tax system (Group 3). When your business is just developing, this form of cooperation will be ideal for you.
The major risk in working with (individual entrepreneurs) concerns the level of individual responsibility. IE (individual entrepreneur) is liable to law and bears responsibility for their obligations to the extent of all their property.
Therefore, LLC (limited liability company) appears to be more trustworthy for clients, but work with (individual entrepreneurs) on the single tax system is more suitable for you if you are just starting your business.
The cost of a product or service you contract from freelance programmers
If a foreign company chooses any of the options of work with freelancers in Ukraine mentioned above, they will have to be aware of the expenditures connected to each option.
In case with LLC (limited liability company), when a company officially employs freelancers, they will have additional expenditures because of more than 40% tax, connected with paying salaries, namely:
- 18% personal income tax (withheld from an employee’s salary)
- 1,5% military tax on personal income (withheld from an employee’s salary)
- 22% (employer-sponsored, i.e. over employees’ salaries).
In most cases companies cut down on their expenditures employing some workers officially and working with freelancers at the same time. However, such form of company structure requires comprehensive tax and legal planning in order not to break the law and avoid getting into trouble with tax authorities. Besides expenditures on paying salaries to hired employees, the local LLC pays 18% income tax (18% of income received).
In case with (individual entrepreneurs), there are some points to be taken into account. To work freelance in Ukraine, individuals can register as individual entrepreneurs choosing the simplified taxation system. This system offers very advantageous and simplified single tax rate of 5%. Besides, individual entrepreneurs have to pay single social security contribution every three months, even if they get no income. Single social security contribution is charged monthly – 22% of minimum wage, set for the month the tax is paid for.
From January to November 2021 minimum wage was 6000 UAH, since December it has been 6 500 UAH.
Therefore, tax on employees’ salaries in LLC exceeds by far income tax for (individual entrepreneurs), even taking into account single social security contribution.
How to transfer money to freelance workers for the services provided
There are several possible ways:
Transfer currency to (individual entrepreneurs) account for foreign currency.
This option allows the freelance worker to legally conduct international business in Ukraine, work with foreign clients. To implement this option it is necessary to conclude a foreign economic agreement in conformity with laws in Ukraine. It is required by the bank carrying out incoming foreign currency transfer. Also, payments according to this contract should be confirmed by(individual entrepreneurs) with invoices, if the bank requires. Tax amount is 5% income tax (single tax) plus 22% single social security contribution – 22% of minimum wage in Ukraine.
The major advantage of this option is its absolute legality.
Transfer to an individual’s card account for foreign currency in the bank in Ukraine.
This option is suitable for not regular one-time transfers of funds. By and large, with such payments the bank requires from freelance workers to sign a statement that “this money transfer is not related to business activity”. Concerning taxes, personal income tax rate is 18%. In addition, you need to pay 1,5% military tax. Technically, this option is much simpler, it does not involve any paperwork and accounting. But in case of regular money transfers to the account, you may be accused of business cover-up (individual entrepreneurs) income tax evasion. There are some more ways to transfer salaries, which may be used if you have chosen this option, namely:
- Transfer to an individual’s card account in a foreign bank
- MoneyBookers, PayoneerDebitCard
- WebMoney, Limonex, etc.
Money transfer to the individual’s account for foreign currency, as well as via payment systems, make the withdrawal of cash more complicated, that’s why IT-specialists prefer to receive money using the first option.
Bank commission to transfer money
When carrying out foreign currency transactions banks charge commission on the money that should have come to (individual entrepreneurs) account. In particular, carrying out FEA (foreign economic activities) operations according to FEA (foreign economic activities) agreements counterparty banks may charge commission for payments and cash services from the amount of money, which freelancer- sole proprietor should receive from a foreign company for work and serviced provided.
According to the laws in Ukraine, if the bank charges commission for payment processing services from the proceeds while carrying out payments for work and services, the income of (individual entrepreneurs) comprises total proceeds and commission charged by the bank. That is, in fact, you will have to additionally pay 5% tax on the commission charged.
How to organize freelance work: telecommuting (mainly, work from home) or coworking
Organizing working space for freelances requires additional expenses a foreign company will have to be ready for. If a company employs one person to work on the project, it goes without saying that this specialist can work from home and no expenditure on organizing working space is required. But it is absolutely different in case of a big project a large team works on.
On the one hand, if a freelancer works from home, it is more suitable for the company as it reduces expenditure. On the other hand, remote work is not always as efficient as needed. There are some distractions that should be taken into account, namely, children, pets or other members of the family that have to work from home due to the quarantine, etc. Therefore, coworking hubs are becoming more and more popular now.
Both individual specialists (copywriters, designers, programmers) and teams work in coworking. Some companies rent entire coworking centres and locate their employees there. Such option helps minimize costs on rent and organization of administrative duties: tea, coffee, cookies, equipment, wi-fi. Work in coworking is beneficial in terms of having the opportunity to rent fixed workplaces according to the list of workers approved by the company. For employers who don’t need to come to the office every day “flexible” workplaces or spaces without fixed workplaces are rented.
There several options to pay for (individual entrepreneurs) coworking:
- the first way is to transfer money (the cost of rent) to the individual’s account as payment for the service provided and then (individual entrepreneurs) pay rent on their own.
- another option is to conclude a contract with the coworking center and pay rent directly. Choosing the first option, you have to take into account 5% single tax of the transfer amount as this transfer is treated as (individual entrepreneurs) income. Choosing the second option you have to pay bank commission charged on the transfer. When drawing up a contract, it should be specified who will have to pay commission. It will simplify mutual settlements and save you from unnecessary proceedings.
Maintenance of accounting and financial records for entrepreneurs in Ukraine
One more important issue to take into account is maintenance of accounting and financial records for entrepreneurs in Ukraine. It includes a set of tasks, namely:
- Individual entrepreneurs registration.
- Annual/quarterly financial statements.
- Preparation of payment document to pay taxes.
- Control over tax payment, absence of tax debt.
- Keeping Income record book.
- Preparation of documents for FEA (foreign economic activities).
As a rule, IT-specialists don’t maintain their accounting and financial records as they are either too busy at work or have insufficient knowledge of accounting and laws. Late submission of reports and late tax payments are punished with penalties. All the financial operations are to be documented, you need to keep all necessary papers to confirm your income (here these are FEA (foreign economic activities) agreements, invoices and certificates of services provided for each money transfer).
To avoid problems with the tax office a foreign company takes the responsibility of maintenance of accounting and financial records for entrepreneurs for their IT-specialists, employing an accountant or an outsourcing company. Such approach simplifies dealing with various matters, beginning with preparation of documents for FEA (foreign economic activities) up to filing annual / quarterly accounts. It also provides the opportunity to get advice on tax optimization issues any time.