Warsaw Voice - Foreigners in Ukraine: Employment and Tax Issues

14 May 2008

The increasing number of foreign companies in Ukraine has created a strong demand for multilingual and Western-educated managers familiar with global business standards and practices.

So far the domestic labor market has been unable to fully meet the needs of foreign investors. Thus, very often, they turn to foreign employees to run their Ukrainian businesses for them. In addition to the specific skills and knowledge foreign employees have to offer, investors can take comfort in the fact that their companies' vital interests are in safe and trusted hands. On the other hand, Ukraine, and Kiev in particular, are becoming an ever more popular destination for expats who find there a unique blend of Western infrastructure and traditional Ukrainian culture.

Entry into Ukraine
A Ukrainian entry visa is not needed by citizens of EU countries, Switzerland, the U.S., Canada and Japan, if their stay in Ukraine does not exceed 90 days. However, foreign citizens (except those of CIS countries), who wish to be employed in Ukraine on a long-term basis, need Ukrainian employment visas issued by Ukrainian consulates/embassies on the basis of the valid work permits. Such a permit may be for a period of up to one year and can subsequently be extended. Likewise, the employment visa can be extended by the Ministry of Internal Affairs' local offices which means that a foreign employee does not have to leave the country to have their visa prolonged. Normally, the employment visa is prolonged for a period equal to that of its initial validity, however, the whole period of the visa's validity cannot exceed two years.

Work permit
Both the constitution of Ukraine and the law "On the Legal Status of Foreigners and Expatriates" stipulate that all foreigners and expatriates have the same labor rights and obligations as Ukrainian citizens. Nevertheless, in order to enjoy labor rights in Ukraine foreign citizens must obtain work permits issued by the State Employment Service. It should be noted that foreign employees cannot directly apply for the work permits, which can be issued only upon the application submitted by companies or foreign representative offices (i.e. prospective employers of the foreign citizen) registered in Ukraine. Therefore, for the purposes of their registration, foreign subsidiaries in Ukraine must first appoint local managers to represent them in all registration procedures. After its registration the subsidiary may apply to the State Employment Service for a work permit for the foreign citizen whom it wishes to employ. After the company receives the work permit for its prospective foreign employee (normally it takes up to 30 days), it may replace its "temporary" local management.

The employment of foreign citizens without work permits may have serious consequences for both the company and the foreign employee: the company will have to pay a fine of 850 hryvnia (around 110 euros) for each illegal employee, while the foreign employee will be deported.

Employment contract
Very often foreign investors concluding employment contracts between their Ukrainian subsidiaries and foreign managers overlook the fact that from the legal perspective this relationship will be governed by Ukrainian law, including mandatory provisions of the Labor Code. Particular attention should be paid to the fact that the unilateral termination of an employment contract by an employer is possible only on the basis of the Ukrainian Labor Code. The employee, however, can always terminate the contract by giving a fortnight's written notice.

Taxation
The taxation of foreigners working in Ukraine depends on their tax status. Ukrainian tax residents pay Ukrainian personal income tax (PIT) on their worldwide income, while tax non-residents pay PIT only for their Ukrainian-source income. Tax residency is determined by reference to several criteria, including the place of residence, the center of one's vital interests, and so on. But, under Ukrainian law, a foreign employee may voluntary opt for Ukrainian tax resident status. Many foreigners working in Ukraine do so, because the standard PIT rate is 15 percent, which is usually much lower than what they have to pay back home.

In addition to general rules on PIT applicable to all individuals, there are a number of specific provisions applicable to the nationals of countries that have concluded double tax treaties with Ukraine. Up to now there are more than 50 such treaties in force. The provisions of such treaties may vary, for example, PIT may only be payable on income from certain sources, or the amount of PIT paid in one of the contracting states might qualify for deduction from the taxable income earned in Ukraine.

Alexey Kostromov