IT Garage newsletter – Issue II, 2020

IT Garage newsletter – Issue II, 2020

We are delighted to share the second issue of our regular newsletter dedicated to the legal developments and IT industry issues in Ukraine. In this IT Garage newsletter, we provide (i) a brief summary of the Ukrainian IT industry developments, stories and news during July-August 2020; as well as (ii) an overview of the recent amendments to the Ukrainian tax laws which may have implications on foreign IT companies with a Ukrainian element.

UPDATE: Ukrainian IT industry developments during July-August 2020

Despite the summer comes to end and it is still good and maybe one of the last opportunities during this summer vacation season to escape from the cities and enjoy a well-deserved vacation at the sunny beaches, many people involved in the IT industry in Ukraine have worked hard over the past couple of weeks to understand the perspectives and further development of the IT industry in the country. If to summarize the opinions and thoughts shared in the various industry reports, researches, and interviews, it seems that there is a cause for cautious optimism.

A popular Internet media for IT industry provided an interesting summary of Ukrainian startups which have managed to raise investments and attract new investors in H1 2020. Revoult ($500 million), Preply ($10 million), Allset ($8,25 million), DMarket ($6,5 million), and ($5 million) are in top-5 for the researched period. The full list is available here.

In any case, the market is apparently changing from the startup’s market to the investor’s market. There is an opinion circulating in Ukraine that money that is available at the venture capital market would suffice for 3-6 months. Therefore, only those startups which are ready to quickly adapt to the changed market situation, revise business model, reconsider competitive advantages, and optimize expenses will be able to attract investors. Though, it appears to be more an urgency and no summer slump for early-stage startups.

As for most of the IT industry, the current situation is not a question of life or death. According to the industry research conducted by the Internet-recruitment portal and released at the end of July 2020, 25% of IT companies do not feel affected by the current situation; 15,2% of IT companies believe that difficult times have gone, while only 9% of IT companies think that the difficult times will last for 2021. 30,4% of Ukrainian IT companies expect that the difficult times for the industry will end at the end of 2020. Moreover, 42,9% of IT companies responded that their staff has not changed, while 41,1% of IT companies reported on the staff increase. Finally, 76,8% of IT companies also answered the salaries of their staff remain intact.

Vice-President of GlobalLogic Denys Balatsko gave an interview where he shared his view on the current situation and further development of the industry. According to Denys, (i) the IT industry will remain to be profitable and will gradually develop, but a previously expected increase of 20% for the Ukrainian IT industry is unlikely. More specifically, the increase is unlikely to exceed 10%. This estimation well echoes with the recent AVentures’ report; (ii) in March 2020, the clients of GlobalLogic were conservative, but now the company gets new projects, new engagements, and expands the existing engagements (that we believe well correlate with +293 new IT specialists who joined the company. According to the most recent research, GlobalLogic was the only among the Big Five Ukrainian IT companies that has been engaging new IT specialists, while in other four companies a number of IT specialists either remained the same or 100+ developers were dismissed); (iii) as many other market players evidence, GlobalLogic also sees that OTT and IPTV services, video conferencing and similar services are on the rise, as well as high-speed internet is in demand. These are the areas where he expects the investments can happen.

Last but not least, the situation with taxation for IT business in Ukraine is heating up again. IT business is against bill No. 3933 that, if compared to the current normal, suggests higher taxes for IT business. According to the calculations made, to apply for the special taxation of income for IT specialists that is suggested in bill No. 3933, a monthly compensation to IT specialist should exceed $3k. This is obviously not what the market can afford today with $2,000 average compensation and pending quarantine outside the windows. The European Business Association provides a good overview of the bill (read the overview here). In our previous newsletter, we also provided an overview of possible implications for foreign customers (read the newsletter here).


New cross-border taxation rules. Possible effect on foreign IT companies with Ukrainian element (R&D in Ukraine, Ukrainian shareholders, etc)

On 23 May 2020, the Ukrainian Parliament adopted so-called Anti-BEPS law No. 466-IX (Law) that is considered as a serious game-changer in the field of cross-border taxation. Immediately after signing the Law, the President suggested amendments to the Law to improve some highly debatable regulations. Business expected that such amendments would also postpone the most ‘painful’ regulations, especially postponement of the rules on controlled foreign companies to 2022, but in vain. New law No. 768-IX amending the Law has entered into force on 08 August 2020 without introducing changes to critical regulations.

In this overview, we look at some of the new regulations which may be of primary interest for IT companies that outsource IT services in Ukraine or have a Ukrainian element in their operational and business structures. We recommend all businesses undertaking internal due diligence to assess how the new cross-border taxation rules might affect the current business model.

Controlled foreign companies (CFC)

The Law introduces the CFC rules. These rules are considered to be a powerful mechanism allowing authorities to tax the foreign profits of residents of Ukraine (individuals and legal entities). The combination of CFC rules and Common Reporting Standards, introduced in over 100+ countries, will allow local tax authorities to ensure better tax transparency and tax foreign-sourced income.

For the Ukrainian tax purposes, a CFC shall mean (a) any legal person registered in a foreign country/territory, or (b) any foreign entity without the status of a legal person (partnerships, trusts, funds, foundations, etc.) controlled by an individual or a legal person resident in Ukraine.

A foreign legal person or entity shall be deemed to be a CFC in Ukraine if an individual or a legal person resident in Ukraine (directly or indirectly):

  • holds a more than 50% of shares (stake) in the foreign legal person (entity); or
  • holds a more than 10% (25% until 2022 inclusive) of shares (stake) in the foreign legal person (entity), provided several individuals and/or legal persons resident in Ukraine jointly hold at least a 50% of shares (stake) in that foreign legal person; or
  • Independently or jointly with other related parties resident in Ukraine exercises actual control over the foreign legal person (entity).

According to the Law, actual control shall mean exerting a significant or decisive influence on the decisions taken by such foreign legal person (entity) concerning concluding transactions, assets and profits management, termination of activities, regardless of how such influence is registered from a legal point of view.

A Ukrainian natural person or legal entity recognised as a CFC controller will file taxes in Ukraine for part of the corrected income of this CFC pro-rata to the share of a taxpayer in such a controlled company.

The Law provides for a number of cases where the CFC rules are not applicable (e.g. total combined annual income of all CFCs controlled by a Ukrainian resident is < EUR 2 million; the CFC is a public company traded on a stock exchange). Despite the income can be out of the scope of CFC rules in the qualifying cases, controlling persons must still disclose their CFCs to Ukrainian tax authorities. Controlling persons must disclose their CFCs to Ukrainian tax authorities for the first time in 2022.

The Law provides for severe fines for violation of the CFC rules, but no fines are applicable during the transitional period 2021-2022.

It is also stipulated that individuals will be able to dissolve their CFCs tax-free during the transitional period.

Notably, residents of Ukraine must also disclose to Ukrainian tax authorities information on the purchase and sale transitions concerning foreign entities as a result of which such resident becomes or ceases to be a controlling person. This disclosure requirement also applies to setting up and liquidation of foreign legal person (entity).

Permanent Establishments (PE) of foreign companies

The Law introduces corrections to the PE definition. For the purpose of taxation, the notion of “permanent establishment” now covers:

  • construction site, installation project or related supervisory activities conducted by a non-resident with the engagement of staff contracted for these purposes under the condition that the general duration of the work, related to a given site, project or activity (within the scope of one or several related projects), exceeds 12 months (previously the term was six months);
  • provision of services including consulting by non-residents through employees hired for such purposes, if the activity is conducted (within the scope of one or several related projects) in Ukraine during a total period exceeding 183 days over any twelve months;
  • persons negotiating essential terms or concluding contracts on behalf of a non-resident if this person exclusively acts only for the benefit of the non-resident or persons (also entities) affiliated with the non-resident;
  • persons or entities storing a non-resident’s goods at their warehouses, which supply goods on behalf of non-residents, except for residents operating customs warehouses and storage facilities.

Unregistered (qualification period – 183 days) PEs are now in the scope of tax authorities.

The above regulations, including severe penalties, apply effective 23 May 2020.

Foreign company as a Ukrainian tax resident

A foreign company with no registered presence in Ukraine can be treated as Ukrainian tax resident and pay Ukrainian corporate profit tax if its place of effective management is in Ukraine. The Law provides for several factors to consider when deciding on whether the foreign company has effective management in Ukraine. For example, even if the company has a place of management in the other country, it can be treated as Ukrainian tax resident provided that (1) its bank accounts are managed from Ukraine, (2) accounting is arranged from Ukraine; (3) employees are managed from Ukraine.

If the set criteria are met, a foreign company has the right to independently recognize itself as a tax resident of Ukraine and to be registered with the tax authorities of Ukraine. Once treated Ukrainian tax resident, such foreign company is no longer be considered a CFC under the CFC rules.

The described regulation will be applicable as of 01 January 2021. This provision is unprecedented in Ukrainian tax law, and authorities have yet to develop the technicalities of its application.


For further information, please contact Oleg Klymchuk (

Information contained in this overview is for general information purposes only, does not constitute legal or other professional advice, and should not be relied upon as a substitute for specific professional advice tailored to particular circumstances.