E-Residency in Ukraine: Law, Tax, and Benefits
Hi! My name is Inna Budna, and I'm a lawyer at Rolique. As an IT lawyer, I often analyze various legislative initiatives, by-laws, and so on connected to the IT sphere.
Recently, Ukraine introduced an e-residency for foreigners. The Law was adopted on October 6, 2022. It brings in the concept of e-resident, which defines the mechanism of taxation, as well as some aspects of the registration of a foreign entrepreneur in Ukraine. The Law enters into force on April 1, 2023.
Today I'm going to consider this Law in detail, analyze it, and express my vision about how an e-resident status can be helpful for foreigners and also positively affect the economy of Ukraine.
What is Ukrainian e-residency
E-resident is a special status that allows foreign freelancers to open and run businesses in Ukraine regardless of their place of residence/stay. It'll enable the formalization of business relationships for specialists who work (or plan to work) with foreign IT companies and pay only one unified flat tax — 5% of income.
In addition to the recently adopted Law No.5270, there are several other ones to determine the status of an e-resident in Ukraine: CMU Resolution No. 648 of June 25, 2020; the Ministry of Digital Decree No. 152 of October 13, 2020; the Ministry of Digital Decree No. 150 of October 9, 2020.
To become an e-resident, a foreigner should:
- reach the age of 18;
- be a citizen/resident or permanent resident of a country included in a special list adopted by the Ministry of Digital Transformation of Ukraine;
- not have a permanent residence permit in Ukraine;
- not be a tax resident of Ukraine;
- not receive income from activities in Ukraine (except for passive income, such as dividends or interest).
E-resident status can't be obtained by:
- citizens of Ukraine;
- foreigners with the right to permanent residence in Ukraine;
- tax residents of Ukraine;
- stateless persons;
- foreigners who receive income for services/works/goods, and which source of origin is Ukraine (except for passive income);
- citizens (subjects), residents or persons whose place of permanent residence (residence, registration) is the state (jurisdiction) not included in the List of states in which citizens or residents are allowed to have an e-resident status.
The List of states whose citizens or residents can acquire e-residency will be determined later by the Ministry of Digital Transformation of Ukraine. The List won't include the following:
- states recognized as aggressors and/or occupying states in relation to Ukraine;
- the FATF's black and gray list states;
- countries with weak regimes for preventing and countering the legalization (laundering) of proceeds from crime, terrorism financing, and/or financing proliferation of weapons of mass destruction.
Benefits of e-residency
E-residents can have the proprietorship status of Group III and pay only one unified flat tax — 5% of income (if the established limit of income isn't exceeded). If the income is higher, they must pay an additional 15% tax on the amount by which the limit is exceeded.
There is a possibility to open a bank account remotely, and use online banking. Moreover, a foreigner could get an e-signature, which allows signing contracts and documents remotely without being physically present in the country.
To apply for e-residency, a foreigner should meet the following requirements:
- register as an individual entrepreneur;
- carry out economic activities for the provision of services, production, and/or sale of goods exclusively for the benefit of non-residents of Ukraine;
- not use the labor of hired citizens or residents of Ukraine;
- not receive income from Ukraine (except for passive income);
- the amount of income cannot exceed 1,167 times the minimum wage established by law on January 1 of the tax (reporting) year.
To summarize, a foreign IT specialist who has received e-residency status in Ukraine can pay a 5% tax if the source of income is payment from a foreign IT company for the services provided without hiring Ukrainian workers. At the same time, e-residents can cooperate with Ukrainian entrepreneurs and pay for their services.
Reporting and paying taxes
The Ukrainian government simplified accounting and submission of necessary reports for e-residents.
The e-resident's tax agent is the bank where the current account is opened. That means the bank independently transfers the tax to the state budget. This should be done no later than two working days from the moment the funds are received in the e-resident's current account, with the conversion of foreign currency into hryvnias at the established exchange rate.
The tax agent is also obliged to submit a tax calculation of the amounts of income and withheld tax according to the prescribed form to the supervisory body at the main place of registration. In case of failure in payment (transfer) of taxes, the tax agent would be liable to pay the penalty.
How to apply for e-residency
The Cabinet of Ministers of Ukraine determines the procedure for applying for e-resident status and other related services. Applying for and receiving the e-resident status is free.
А foreigner must submit the following documents:
- an application;
- copy of the passport;
- copy of the information on the presence/absence of a criminal record.
An application form for acquiring e-resident status should be filled out in English.
All submitted information will be checked by the MIA and Security Service of Ukraine regarding the presence or absence of prohibitions or restrictions on the applicant's acquisition of e-resident status. The inspection lasts for 20 (in some cases 30) days.
Thereafter, an applicant is set a date and time in the foreign diplomatic institution of Ukraine in the state of permanent (temporary) residence (stay). They will be identified and performed in other procedures related to granting the e-resident status.
To register an e-resident as an individual entrepreneur, an application should be submitted electronically with a qualified electronic signature. Along with this, a foreigner needs to show their international travel documents.
Submission of an application for e-resident status is equivalent to a personal submission of the registration card of a physical taxpayer to the relevant controlling body and an application for registration in the State Register.
Registered e-residents as natural persons-entrepreneurs are considered single taxpayers from the date of their state registration. There is no need to submit an application for choosing a simplified taxation system.
Correspondence between controlling authorities and e-resident carries out in an electronic form. The e-resident's tax address is rated the e-mail address specified in the application for acquiring the e-resident status.
It is assumed that all communication with state bodies, institutions, and organizations will be conducted in English.
Ukraine borrowed the experience of a similar e-residency in Estonia. Their system has been operating since 2014 and is quite successful. Furthermore, such cooperation systems with foreigners work or are in the implementation process in other countries, such as Lithuania, Portugal, Japan, South Africa, Singapore, etc.
For Ukraine, the primary purpose of e-residency is to attract additional investments to the budget of Ukraine. During the war, it is important to attract funds to the budget and promote the development of a system of doing business by foreigners.
But how about foreigners? Will foreign IT companies be interested in paying the specialist as an e-resident under the relevant contract? I think there are plenty of interested ones. It significantly reduces the costs of taxation, and gives an IT-specialist the opportunity to earn more, while helping Ukraine.
There are also numerous benefits for e-residents:
✔️ a legitimate status and business under the laws of Ukraine;
✔️ simple, open, and legitimate cooperation with companies;
✔️ remote automated services for starting and running a business;
✔️ a tax rate of only 5% of the amount of income received;
✔️ online banking;
✔️ informational support in English.
To summarize, e-residency is a win-win initiative for foreign specialists and companies, as well as the Ukrainian government.