The cost of labor and taxes is majorly the issue of concern for foreign investors and employees alike when looking at moving to another country or region. If you are deciding to establish a company in Ukraine, there is the possibility that you need to hire local as well as foreign expatriates to work for you. This is why you must get yourself sensitized about the peculiarities that concern employment laws, cultures, laws, and regulations backing the taxation of employees in Ukraine.
This article, therefore, contains a comprehensive and simple guide of Ukrainian employment laws, types of employment, and regulations that guide taxation, termination, employees’ working hours and vacation and so much more.
Ukraine is the second-most populous country in Eastern Europe and is regarded as one of the world’s largest exporters of grains and therefore has a large heavy industrial sector. Due to this fact, it presents itself as a promising country where expansion can take place and international businesses can thrive. Ukraine’s economy is also underpinned by mining, agriculture, and energy.
Asides from all these industrial prospects which Ukraine has, it is one of the countries that have the least labor costs in the world and this has attracted many companies willing to take advantage of this to expand their business in the middle-east country.
However, it is a matter of concern to set up a business in Ukraine as setting up a business in this country can be complicated. The reasons for this are the issue of bureaucracy and the changes in legislation from time to time which happens regularly. Hence, the need to get educated about the dynamics of operating a business in Ukraine.
A company can hire an employee based on a labor agreement which is under the labor code of Ukraine. A company can also hire the services of an independent contractor through sub-contractual agreements that are governed by the Civil code of Ukraine. The individual contractors are also known as freelancers are registered as private entrepreneurs (PE) on a simplified tax scheme. The conditions and terms of employment of an individual contractor are not regulated by the Ukrainian labor code and these terms are only included in the service agreement with a freelancer.
If a company employs a person based on being a salaried employee, the company automatically incurs the tax overhead of about 40% of the salary being paid to the employee. On the contrary, the company will need to incur only just 5% of the salary that is paid to a freelancer based on the agreement undertaken with the independent contractor. Companies therefore in the quest of reducing their tax costs tend to arrange workers as a mix of full-time employees and freelancers.
Agreement of Employment
Ukrainian laws make it a requirement that the terms of employment agreement should be made orally or in written format. A non-resident of Ukraine is expected to fill out a written form that states the terms of the agreement of employment. Also, the hiring of workers that are of a single entity and are under the age of 18 is expected to be filed under a written form of agreement. Ukrainian laws of agreement are classified into some major types and these are:
Labor Agreements that are indefinite
Employees who are placed on employment for an indefinite amount of time are prepared with this form. This form of agreement of employment is the most common in Ukraine. The regulation of this form of a labor agreement is guided by Ukrainian laws. The company to which is employing is also expected to have internal rules and regulations that ensure that the agreement is kept to by both the employer and the employee.
Labor Agreement for Fixed Term
This is prepared for workers that are employed over a specified period in Ukraine. However, Ukrainian law provides some limits to the repeated conclusion of fixed-term labor agreements. This provision makes it possible that an individual who is employed repeatedly for a short term specifically in less than 2 months is said to work indefinitely for the employer.
Workers can also be employed seasonally in Ukraine and the interests of both the employer and the employee are protected by Ukrainian law. This form of labor agreement calls for the indication of the type and scope of work for which a person is hired and the need to stipulate the terms of employment agreed upon by the employer and the hired personnel.
There exist certain special cases whereby a worker is employed through the means of a contract. It is expected that the document for this term of employment should be stated in written format and legally bonded. The CEO of the employing company must include some important terms in the written form as this serves as a record. Important information such as the length of time the employee is expected to work, the compensatory benefits which the employer is expected to pay to the employee must be included in this written form prepared. There should also be included in the filing the obligations of the employee which includes the job organization of the employee and termination terms in case of that.
Personal Income Tax in Ukraine
A fixed rate of 18% is calculated for the monthly salary of the employee as income tax to be paid to state authorities. As a tax agent, the employer is expected to withhold the calculated deductions from the monthly remuneration paid to the workers and pay the money on their behalf. The income tax is deducted from all the payments that are made to the employee which includes the gross salary, private earnings which include compensations and benefits, and private lottery winnings.
A month plus 10 days is provided for the payments of the income tax to be done to the necessary body in charge of collection.
About 1.5% of the income that a worker earns from his/her salary is expected to be paid as military tax. This form of tax applies to residing individuals and those that are not residing in Ukraine but are employed in the country. This tax is needed to be paid in line with an income tax that is paid by the employer, and they are deducted from the earnings of the employee.
Income paid by Nonresident individuals
Workers who are non-resident of Ukraine but are working for a company situated in the country are expected to remit a tax at a rate of 30%. Private winnings such as lottery and casino wins are also taxed at this rate for individuals who are a non-resident of the country. The only condition whereby a non-resident is not expected to pay tax at the rate of 30% is when there are duly collected documents from the regulatory body that exempts such a person from paying such taxes.
Conditions needed to be fulfilled for tax resident
A person whose primary country of domicile is the particular country in question is said to be a legalized tax resident of that country. Sometimes a person may have residences in more than a country, and it proves difficult to ascertain where the person is classified as a tax resident. This situation is solved by checking the person’s deeper relationship in terms of economy and physically. A person is therefore said to be a Ukrainian tax resident if the presence of the person in the nation is at least 183 consecutive days in the calendar year. Furthermore, it might prove still difficult to classify someone as a legal taxpayer in Ukraine asides the above conditions. In such conditions, citizenship is brought into light of which the person who has a certificate of citizenship of Ukraine is legally recognized as a tax resident of the country. Another way of determining this is by acknowledgment: which involves a person pledging himself/herself as a tax resident. Both naturalized Ukrainian citizens and foreign citizens who meet up with the conditions above are given the same tax treatments without bias.
Income that are Taxable in Ukraine
In the country of Ukraine, there exists a series of incomes that are considered taxable. This encompasses several compensatory benefits that are enjoyed via employment, benefits that come from trades, due-on-sale clauses, insurance benefits, pension compensations and others.
Allowances and Tax Deductions
Deduction occurs on some certain things such as interests on mortgage, donations made to registered charitable organizations, expenses made to fund the study of the tax remitter or his/her direct relations, and medical expenses. The filing of such deductions need be made by the beneficiary for proper recording and efficient claim.
Real Property tax
In Ukraine, persons or entities who are privileged to own a property on the country’s land are the group who pays these. Both naturalized citizens of the country and foreign nationals who are owners of estate properties remit these tax payments. Apartments and houses exceeding 500 are expected to have an increase of 25,000 UAH (Ukrainian Hryvnia) in taxes to be paid for each object. Some conditions exist that serve as the determining value of the tax to be paid by the property owner. Such conditions include where the land is situated in the country of Ukraine, the service which the land serves etc.
The flat rate for VAT in Ukraine is put at 20% and this includes locally produced goods and those that are imported to the country. Although, an allowance of 7% can be made for medicines that are registered and some types of medicines that are imported. No rate is applied to goods that are moving out from Ukraine to other places as they are free to be exported. Some other services are also taxed at a 0% rate. These include international offered transport services, services on goods manufacturing and other export haulage services.
Filing on VAT should be completed within 12 months or even done quarterly. Monthly tax report filings are done within 20 days of the original reporting of the tax filing. Tax payments that are done on a 4-month basis should be completed within the time frame of 40 days from the original reporting of the tax payment.
Tax on Inheritance and Estate
A flat rate of 15% is expected to be remitted by nonresidents or someone who isn’t naturalized in Ukraine who has inheritances such as real estate, securities, corporate rights, chattels. Residents’ relative who isn’t a close relative is taxed at the rate of 5% for inheritances while persons or group of persons who is a close relative of the person leaving the inheritance are taxed at no rate.
Contributions to Social Security
A person who is enlisted in the social security system of Ukraine gets to pay this contribution. An enrollee in the system pays this at his own cost. As early as the employment of the payer is terminated, there is a stop to the payment of this contribution by the enrollee as the name is now removed from the state’s system list. The SSC is put at 22% of the enrollee’s gross earnings which includes the salaries as well as the compensatory benefits that are paid to employees. Foreign personnel who work in a company that is not a local Ukrainian company are not expected to pay the SSC.
Payment of Tax in Ukraine
The State Fiscal Service of Ukraine is the authority in charge of rolling out tax policy in the state of Ukraine. The legal codes regulating the payment of taxes is what is known as the Ukrainian Taxation code. The fiscal year is determined by the 12-months calendar year. The corporate income tax is enlisted as a quarterly submission usually but in some cases, they are done annually. Most of the responsibility of withholding SSC, PITs, CITs in Ukraine is done by the employer who is also expected to file the tax returns. The employer is also regarded as the tax agent and they are expected to make a report filing of on personal income tax every 4 months.
To claim a tax credit in respect to certain expenses that are incurred in a fiscal year, a return of tax should be done individually on an annual basis. Also, a person receiving funds that are classified as taxable such as income from abroad, funds from sources that are different from the employing companies; they are expected to make a filing of a personal income tax return by April 1 of the year following the reporting year.
An interest of 120% gets attracted to taxes that are not paid early, and this deduction is calculated daily. Application of further penalties meant for situations of not fully reporting the tax return is tagged at deductions of 10% – 50% of the liability that is understated. 200% accumulation of tax also serves as a punishment for agents who fail in his/her duty of holding on to PIT. This also applies to social security contributions that are underpaid.
The standard working week length in Ukraine is put at 40 hours with 5 working days per week and 8 working hours per day. The employer however may tend to adopt a decision to introduce making employees to work between 6-7 hours every day, but this is in special conditions where there is the need for the company to meet a target at a short-predefined time. Personnel working under harsh working conditions and also individuals who are below the legal adult age (18) are entitled to work less time in a week. For example, individuals who are between 16 and 18 years of age may not work more than 36 hours a week. Students/ pupils who are engaged in work during school-free days may be allowed to work at most 23 hours in a week.
In cases where a worker has to work additional hours, the cases of overtime should be properly recorded in a way that compensation should be paid to workers who work overtime whether in the inclusion of extra free time in other work weeks or being paid double wages. Workers who are pregnant or nursing children who are still toddlers (< 3 years) are forbidden from working on an overtime basis. Also, employees who are below the legal age or who are studying at school are forbidden from overtime work.
All overtime works that are in the excess of 40 hours in a week are paid at an overtime compensation rate of 200% of the regular hourly rate wherein the worker was paid. A new day of rest may be given to the worker as compensation for working overtime and affecting a previous day and this must be in line with payment.
Employees in Ukraine are entitled to take 24 calendar days as vacation days in a year. This entitlement excludes service providers governed by the civil law agreement. This annual leave is paid to employees who wish to go on vacation after completing at least 6 months of continuous employment. The entitlement may be increased for workers who are minors or those employees who are engaged in difficult and dangerous jobs.
The allowance which is given to a worker going on vacation is worked through based on the average salary being collected by such person. The compensation of the worker through the stretch of the year is used to determine the amount of allowance to be paid which is through dividing by number of days the person worked in the year. Some days are excluded from these calculations which includes; compulsory holidays, reported excuse from work that are unpaid.
In cases where a working personnel takes some time off from work due to illness, the individual is required to make provision of a document that verifies the absence of the person from work in form of a sick leave certificate. The employer of such personnel is responsible for paying compensatory benefits for the first five days. The other days of which the worker is absent from work is compensated by the Ukrainian Social insurance fund.
Employees are only entitled to four months of paid sick leave and the amount of Social Insurance fund compensation is determined by the seniority of the personnel. If an employee has less than six months of employment, the payment is calculated off the minimum wage. An employee who is employed for at least 3 years is paid 50% the prior payment he/she receives before the leave of absence. Also, employees who fall within the range of 3-5 years of employment, get to be paid 60% of their salary. Those within the range of 5-8 years of employment, get paid 70%. Finally, those employees that are employed 8+ years, get to be paid 100% of their average salary.
The entitlement leave for employees at Ukraine allows 126 paid days of leave of which 70 must be taken before the estimated due date of the child and 56 after the child’s birth. The Social Insurance fund compensates 100% maternity leave of the average salary of the employee. Provision is also made for mothers to take extra leave after the expiration of the maternity leave to take care of the child until he/she turns 3. This additional leave is an unpaid one.
However, in the case of the male, there is no paid paternity leave in Ukraine. The father is only allowed to take two weeks of unpaid leave for the child’s birth. There is also the allowance for acquiring leave from the mother’s maternity leave if the mother has returned to work. This can be done if a father applies to his employer and make a provision of the child’s birth certificate, a document that confirms family ties, and as well a certificate that confirms that the mother has returned to work.
Other forms of leaves which an employee can embark on include those that are approved by the employer after the employee has provided credible grounds for taking such leaves. These include the loss of loved ones, leave for marriage which is usually 10 days from the point of report, and also study leaves of which are compensated by the employer.
Employment termination can be initiated by either the employing contractor or the worker. The period of notice for employment termination depends on the particular party that is making the initiation of the termination process. There should be a 2 months’ notice presented when the employer initiates the termination of employment. A 14 days’ written notice is required from the worker (employee) when he/she is initiating the termination of the employment. If in the case that the employees are dismissed by consent of both parties (employee and employer), the employment termination process may as well be concluded in a day.
An employing contractor may also terminate the agreement of employment due to some reasons. These reasons might be if there is a redundancy in the staffing strength, inability of workers to fulfill their duties for which they were employed, the employee not having sufficient qualifications to take on employment and deteriorating health condition of an employee. Another condition whereby an employer may terminate the employment of an employee is in such condition where an employee leaves the work for 3 consecutive hours without taking prior permission or notice from the employer.
There is a prohibition on the termination of a pregnant women’s employment. Prohibition also exists in terminating the job of women whose children are below the age of 3, and single mothers who are raising teenagers (< 14 years). The employer should pay the salary of the employee for the number of days that were worked in the month of the dismissal. The employer must also compensate the employee for vacation days that are unused as well as paying other payments necessary.
A company that does business in Ukraine can hire people through either a labor agreement that concerns an employee who is placed on salary or under the civil services agreement which is prepared for those workers that work as freelancers. This article has highlighted these regulations and how well they apply for each group of workers in Ukraine. It is therefore expedient that one carefully adopts the policies of employment in the company as well as follows the labor regulations that are put in place to avoid any court disputes which are time-consuming and lead to the loss of significant losses. Engaging the services of a PEO like WeHireGlobally is a step ahead in taking the globalization leap to Ukraine and other countries around the world. Check out our amazing services here.