There is no limitation on the percentage of ownership by a foreign investor in most types of Ukrainian companies. Preferred forms of foreign company operations in Ukraine are: a joint stock company (JSC), limited liability company (LLC), wholly-owned subsidiary, or a representative office. For regulatory and taxation purposes, with some exceptions, representative offices are treated similarly to independent legal entities. A representative office can carry out marketing, promotional, and other auxiliary and preparatory functions on behalf of the company, or it can conduct commercial activities like any other legal entity. There is no prohibition for a foreign legal entity to have both a representative office and to establish a wholly owned subsidiary at the same time. Some industries, including banks and insurance companies, are more heavily regulated, and entities must be established in compliance with specific requirements.
In choosing between an LLC and JSC, it is generally recommended that an LLC be used since it is easier to manage than a JSC. Shares issued by both closed and public JSCs must be registered with the State Commission of Securities and Stock Market. There are two levels of taxation: the JSC is taxed on its profits and the shareholders are then taxed when dividends are distributed.
In a Limited Liability Company, ownership interests are expressed in terms of contractual rights that arise out of the foundation documents. Interests in an LLC are not deemed to be "securities," and therefore, are not subject to registration with the State Commission of Securities and Stock Market. As with a JSC, there are two levels of taxation for an LLC.
Registration of a Representative Office
Registration of representative offices of foreign companies is handled by the Ministry of Economy and European Integration of Ukraine, and is done within 60 days of submission of all required documents and upon payment of a US$2,500 fee.
For registration of a representative office, the Ukrainian Ministry of Economy and European Integration requests the following documents:
1. Application for registration on the letterhead of a company signed by the head of the company and with its corporate seal affixed. The form is free. (Note: An original of the application with a notarized signature of the head of the company must be submitted.)
The application must contain:
2. Extract from the trade register of the country where the officially registered central management body (office) of the foreign entity is located (Note: This document must be notarized).
3. Certificate of a bank that services the company, containing the account number. (Note: the original of the bank certificate must be submitted. The signature of the bank employee issuing the certificate must be notarized).
4. Power of attorney in the name of the specific person appointed to execute the representative functions in Ukraine, indicating the specific authority of the representative (Note: The original of the power of attorney with the notarized signature of the head of the company must be submitted).
Originals of the documents listed in Paragraphs 1,2,3,4 have to be duly legalized (with an apostille) in the consular offices representing the interests of Ukraine. The documents must be in the Ukrainian language. A seal of an official translator must attest to the translation. The documents must be submitted to the Ministry of Economy and European Integration of Ukraine no later than 6 months after being issued in the country of origin. Upon acceptance of registration documents, an applicant will pay a registration fee, amounting to US$2,500. Within a month of obtaining a registration certificate, a representative office must register with the local tax inspectors.
Registration of Other Legal Entities
All business entities with legal entity status (resident or foreign) shall be officially registered by the administrative body of the city, city district, regional councils, Kiev or Sevastopol district state administrations (hereinafter referred to as official registration authorities) at the place of residence of the given business entity, unless otherwise provided by law.
The following documents should be produced for registration:
These documents must be duly approved according to the law of the country of origin, translated into Ukrainian and legalized in a consulate of Ukraine. They should also be approved in the Embassy of the corresponding country in Ukraine and legalized in the Ministry of Foreign Affairs of Ukraine.
After registration, the company must be registered with the state tax and statistics authorities, and can appoint a board of directors who open the company’s bank accounts.
The local banking community is represented by various local and foreign banks. Ukrainian banks, depending on the details of their license issued by National Bank of Ukraine (there are approximately 30 separately licensed banking activities), offer the following services: current accounts in Ukrainian Hryvnya and foreign currencies, domestic and international payments, cash operations, documentary operations, lending, currency conversion, deposits, operations with securities, brokerage services, trusteeship of assets and customers securities portfolios, financing of investments on behalf of owners or trustees of invested funds, consulting and analytical services, precious-metals trading in the Ukrainian market, purchase and sale of currency on the domestic interbank and international markets. Some local banks have affiliated leasing companies.
Finding a proper location for an office in Kiev is not an easy and quick task. Office space is available in a variety of forms in Kiev, but the most common approach is long-term leasing. There are different options for renting office space in Kiev; foreign companies coming to Kiev traditionally rent office space in modern business centers or in renovated and remodeled large private apartments downtown Kiev. Another option could be renting office space in hotels or formerly state-run enterprises. In some cases the major problems might be poor ventilation, inconvenient design inside the building and limited or no parking space.
Perhaps one of Ukraine’s greatest resources is the practicality of its professionals. For more than reasonable rates, Ukrainian experts can be hired to do the job of their Western counterparts without paying them a Western-size salary.
Labor relations in Ukraine can be categorized into two groups of employment relationships: (1) labor employment agreements governed by the Labor Code of Ukraine; or (2) sub-contractual agreements governed by the Civil Code of Ukraine. The first category is further divided into three different types of labor agreements: (1) labor agreements of indefinite duration; (2) labor agreements of specific duration; and (3) labor agreements effective for the duration of a specific project. One type of agreement of “specific duration” is called a “labor contract,” which permits an employer to prematurely terminate such contract only for reasons provided Ukrainian labor legislation.
There are several options for identifying local personnel for hire, including placing advertisement in local business magazines and newspapers and contracting recruiting agencies.
The benefit package typically consists of two parts: benefits guaranteed by law and additional benefits and bonuses provided by company. At the initial stage of employment, an employee is hired on the basis of a labor agreement and may be placed on probation for a period not exceeding either three months or one month, depending on the classification of such worker under Ukrainian law. If the employee continues to work after such period has expired, the employee is considered to have “passed the test,” and is entitled to all rights and protection under Ukrainian law.
Essentially, this means that Ukrainian employees are entitled to social security benefits and must be paid at least the minimum monthly wage (205 Hryvnia) during the course of a normal workweek of no more than 40 hours. Any additional time put in by the employee, even if he or she is hired on a temporary basis, is subject to overtime payment rates. No compensation for overtime work by giving time off from work is allowed under local legislation. Depending on the actual duration of the employment term, the employee also is entitled to vacation and sick leave, and a regular schedule of salary payments twice a month. Under current legislation, companies (joint ventures, 100% subsidiaries and representative offices with commercial activities must pay toward social security 37% of its employees’ monthly salaries (incl. 32% to the Pension fund and 5% to the Disablement Insurance Fund and Unemployment Insurance funds). Consequently, employees receive a net salary after payment of all relevant taxes and social payments.
Various employers, including wholly-owned foreign subsidiaries, joint ventures and even representative offices, employ so-called “labor contracts” as their favorite form of labor agreement because only a “labor contract” may contain provisions in addition to those contained in the Labor Code, including employment period, rights, obligations and responsibilities of the parties. The labor contract affords the employer the widest latitude in instituting a labor relationship because all additional rights and obligations are enforceable simply as contractual agreements of the parties.
In contrast to labor agreements sub-contractual agreements typically contemplate hiring a worker to complete a specific task at his or her own risk. As elsewhere in the world, the sub-contractor maintains relative independence in the performing the designated task and typically receives payment upon completion of services. Notably, the sub-contractor does not receive the benefits of social security, and is independently responsible for paying his or her own personal income tax. To legally act as a sub-contractor for foreign business entities, Ukrainian sub-contractors must register as so-called “subject of entrepreneurial activity” for tax purposes. Most citizens with impunity ignore this requirement, which entails additional time, efforts and expenses.
U.S. managers should be prepared for the fact that the qualifications of local specialists in certain areas are not equal to the qualifications of U.S. staff, and significant training might be required. Some companies prefer to hire motivated young people with initiative, some business experience and higher education and train them in the specialties they need (mostly sales managers, logistics and marketing specialists) on their own. Top managers are usually hired though recruiting agencies. The salaries offered by Ukrainian and foreign companies are almost equal. Young professionals prefer to work in foreign companies due to the extensive training and fast career growth. Relationships in foreign companies are more predictable and formalized and less dependant on the top manager’s mood (unlike in many Ukrainian companies).
Under Ukrainian labor laws, in order to hire any Ukrainian citizen, an employer should receive from such prospective employee his or her labor book and passport. If the position requires special skill (e.g., driver), the employee must also submit the appropriate professional document (e.g., a driver’s license). No other documents are required from the Ukrainian employee. The Ministry of Labor issued an instruction on March 15, 1994, containing the model labor agreement generally acceptable for employment purposes in Ukraine. Many foreign companies, however, prefer to use their own forms, slightly adjusted to fit Ukrainian legal requirements.
Importantly, all employers, including enterprises, institutions and organizations, must maintain labor books for all of their full time employees (i.e., everyone other than subcontractors or part-timers) including seasonal and temporary workers. Such labor books typically contain information about the type of work performed, any awards and the duration of employment. In essence, labor books serve as a basis for ascertaining the employee’s work longevity, which will determine his or her social security and pension rights after retirement.
If a U.S. company plans to hire a foreigner, including U.S. citizens, as an employee, he or she will have to submit an application to obtain a work permit in Ukraine. This requirement specifically applies to foreign citizens who are sent to Ukraine by a foreign employer to work on the basis of a contract between such employer and a Ukrainian resident enterprise. The application for a work permit must be accompanied by various documents, including the employment contract.
Today, the Ukrainian authorities are increasing their supervision over the activities of foreign commercial entities, particularly representative offices, as they are suspicious that representative offices might be concealing profit earned from “commercial activities.” Therefore, in addition to the typical tax dilemmas and currency regulations issues, strict compliance with labor laws also requires the close attention of foreign companies and investors.
Equipping an Office
A large selection of office equipment, furniture and supplies is available in Kiev. A number of trading firms offer office furniture imported from Poland, Italy, Germany, Spain, Finland and other countries. On average, local retail prices for furniture are higher than those in the U.S. Locally made office furniture is also available. Imported raw materials and Western design to tailor-build furniture makes it very attractive for companies. Even though similar in appearance to Western-made furniture, these usually are less expensive and often considered to be of lower quality. Office equipment (desktops, laptops, PDAs, printers, projectors, digital cameras, etc.) can be ordered locally from a large number of stores offering equipment starting from less expensive local and Chinese brands to famous brands such as Compaq, IBM, Dell, Sony, Samsung, etc. Certain licensed software is also available locally for relatively low prices. It is not recommended to bring office equipment from the U.S. due to customs duties and certification requirements. However, U.S. businessmen can easily bring personal laptops, digital and video cameras, PDAs, as these items are seen as personal belongings.
There are a number of companies that provide local loop phone line access. Among them, Ukrtelecom is the largest company in the country that provides public area network services. Over the past few years the company has been upgrading its telephone equipment. Most of its equipment is digital now and new customers use only digital lines, although analog lines are still in use. The installation of a phone line connected to digital equipment costs about $125. Although most offices are located in the central part of Kiev, some remote parts of the city have only analog lines making it impossible to connect to digital ones. No matter the telephone system chosen, companies will have to pay a monthly service fee of approximately $3.00. Tariffs for within city and inter-city calls are relatively low, but tariffs for international calls cost about $1.5-2.00 per minute. From this prospective, it makes more sense to use IP-telephone cards available in city kiosks; in this case rates vary from $0.25 to $0.60 per minute depending on the call destination.
Mobile phone services are available from five local operators (UMC and KievStar – national operators, WellCom, Golden Telecom, DCC – cover Kiev and several other large Ukrainian cities) and monthly payments may vary from $10 to $100 (for unlimited package from UMC or KievStar). All incoming calls to cell phones are free of charge for cell phone users.
High-speed Internet is becoming more and more available for regular users in Kiev. In the last two years the price for DSL or a dedicated line connection has gone down to the level when it’s affordable even to home users but it still might be more expensive than in the U.S.
Basic business services such as advertising, printing, legal, interpreting, conference organizing, consulting, marketing, accounting, customs brokerage, warehousing, freight forwarding, express mail, etc. can be easily found in the market. Reliable companies with quality and professional services can be contacted though American Chamber of Commerce in Ukraine.
Although the crime rate in Kiev is relatively low, U.S. companies should pay attention to security issues, both personal and business. It is recommended to secure your office with security guard services and install alarm and security systems to protect office employees not only from possible crime but also to avoid any disturbances and troubles from unwanted visitors (market distributors, commercial travelers and loiterers). There are many local security firms and agencies— both state and private—which offer office and body guard services, due diligence, detective services, security system installation, and review of rental agreements to prevent fraud. To provide such services, the company should be officially registered and possess license from the Ministry of Internal Affairs.
The best initial sources of information about the local international business community and business environment as well as useful contacts are BISNIS and the Commercial Service of the U.S. Department of Commerce and American Chamber of Commerce in Ukraine. Its main goal is to assist and protect interests of its members. The Chamber has weekly happy hours in different city restaurants and cafes. Chamber has regular meetings with different guest-speakers, including those from the Ukrainian government and parliament.