Ukraine
in numbers
Ukraine offers favorable regulations for self-employment, with an online registration process and low fees. However, there is a moderate language barrier due to limited English proficiency among local authorities. EORs are commonly used, although not explicitly regulated under Ukrainian law.
Ukraine scores low because of reclassification risks. Authorities assess factors like the degree of control, nature of work, and the self-employed individual’s independence. Misclassification can result in reclassification penalties.
Ukraine’s low self-employment tax rates (5-6%) make it appealing. Tax returns can be submitted online without visiting a tax office, and the process requires only basic knowledge, reducing administrative burdens for contractors.
Ukraine’s exposure score is moderate, with high reclassification penalties and a 35.5% tax increase if a contract is deemed employment. Additionally, there is a Permanent Establishment (PE) risk when providing long-term services.
Ukraine scores high due to its easy online procedures for opening bank accounts and registering businesses. Rapid payment transfers are possible, though contracts may need specific provisions under local law.
Ukraine scores low, as it does not offer a digital nomad visa. However, other types of visas are available, providing limited but possible routes for foreign contractors and freelancers.
Key takeaways
Ukraine offers a relatively supportive environment for global companies to hire top talent without setting up a local entity. Self-employed contractors handle their own taxes and social contributions, making it easy to work with them. This flexibility helps businesses scale faster while tapping into Ukraine's skilled and diverse workforce.
Frequently asked questions
In Ukraine, companies can easily engage self-employed contractors without a local entity, as contractors handle their own tax declarations and contributions. However, hiring employees requires either establishing a local entity or partnering with an Employer of Record (EOR). To minimize the risk of misclassification, it’s crucial to carefully structure contracts and clearly define the working relationship.
While the EOR model is not specifically regulated under local laws, it is widely accepted and commonly used in practice. However, without properly structuring and documenting the arrangement - clearly outlining the responsibilities, rights, and obligations of each party - local authorities could potentially interpret the relationship as direct employment between the company and the worker. To mitigate this risk or of potential misuse of the EOR model*, it is recommended to document these aspects in writing and provide full disclosure of the employment arrangement details to the EOR partner to ensure accurate reporting and compliance.
*Misusing an EOR includes hiring full-time employees as temporary roles to bypass benefits and labor laws, ignoring statutory obligations such as minimum wages or collective bargaining agreements, avoiding corporate taxes or employer contributions, terminating workers without adhering to local protections, and withholding from the EOR critical details about employment terms, leading to compliance risks and inaccurate filings.
When hiring contractors through a foreign entity (without using an EOR), there are no tax withholding or reporting obligations for the company, as the contractor is responsible for managing and paying their own taxes.
Offering health insurance is a common and widely accepted practice in Ukraine and is generally not seen as a significant factor in misclassification. As long as the health insurance is clearly outlined as part of the contractor's compensation package and the overall working relationship supports independent contractor status, it does not increase the risk of being reclassified as an employee.
Determining the correct contractual relationship
If Ukrainian authorities were to review the contract, they will classify the relationship as a B2B arrangement if the self-employed contractor:
- Operates independently and is not an essential part of the company’s core business
- Lacks authority to hire or dismiss staff
- Has full control over how their work is carried out
- Sets their own project fees or service rates
- Chooses their work location, schedule, and hours
If the above criteria are not met, the relationship should most likely be classified as an employment relationship.
Financial risk associated with a potential contract misclassification
In the event that a contractor in Ukraine is reclassified as an employee, a compliance review by the authorities may trigger obligations to pay back-pay employment related taxes. If the person did not previously receive benefits on par with employees, the company could also be asked to compensate them retroactively.
In Ukraine, the statute of limitations for worker misclassification claims is generally three years from when the claimant became aware or should have reasonably been aware of the violation.
Additional taxes
In case of contract reclassification, the company could face additional taxes totaling 35.5% of the individual’s gross salary*. Of this amount, 22% is the employer’s responsibility, and 13.5% is the employee’s share. These taxes would be charged to the company.
*To keep things comparable, we use a gross income of $4,000/month to determine the potential exposure. The calculation takes into account equivalent taxes paid to the authorities by the self-employed person during the same period of time. The exact amounts might be different depending on your regular payouts.
What could trigger a compliance review?
A compliance review in Ukraine can be triggered by complaints from disgruntled contractors or routine audits conducted on self-employed individuals by tax authorities. These reviews may lead to closer scrutiny of worker classifications and contractual arrangements.
How will any additional amounts be charged?
If the foreign company is held responsible for paying back taxes, social security contributions, fines, and/or interest, Ukrainian authorities can pursue these payments through international cooperation treaties with foreign tax authorities.
Will a local contractor trigger a permanent establishment?
Yes, hiring a self-employed contractor in Ukraine for more than 6–12 months can trigger a Permanent Establishment (PE)* for a foreign company, as specific legal provisions address this scenario. Although the PE risk is lower for long-term contractors compared to employees, it still exists and may be flagged during tax audits, especially when reviewing worker classification. To mitigate this risk, clearly define the contractor’s independent status and limit long-term, employee-like engagements.
*A PE represents a fixed place of business through which a foreign company conducts its commercial activities in Ukraine. If a PE is established, the business income associated with it will be subject to local taxation.
Is paid health insurance one of the indicators used by local authorities to determine if a worker is misclassified?
It is common practice for contractors to receive health insurance, and tax authorities rarely scrutinize this benefit. As long as health insurance is clearly defined as part of the contractor’s compensation package and the overall working relationship supports independent contractor status, it is unlikely to increase the risk of misclassification.
About the Future of work index
This information is provided by SafetyWing in collaboration with a Big 4 company to assist companies in understanding potential compliance risks. While we strive to provide accurate and up-to-date information, it should not be used as the sole basis for ensuring compliance. Individual circumstances and changing laws may alter the applicability of this information. Please seek appropriate professional support.
