How low taxes could give Ukrainian e-residency the edge over its competitors


An attractive tax rate of just five percent could be set to give Ukraine’s e-residency program the edge over regional competitors and further boost the country’s already booming computer industry.

Ukraine’s parliament last month passed a bill on electronic residence that will allow foreign freelancers engaged in the information technology sector to run an independent business from their location in the country.

According to the country’s digital transformation minister, Mykhailo Fedorov, the program is expected to bring in around US $ 1.5 million per year to the state budget. But the benefits, he says, go far beyond income.

“Electronic residency can make Ukraine a powerful computing center in Eastern Europe,” Fedorov said Emerging europe. “Thanks to e-residency, our country will quickly become attractive to foreigners looking to do business – especially computer specialists.”

Applications for the program are already open to citizens from a shortlist of countries: Germany, Thailand, Pakistan, China, Israel, Bangladesh, Slovakia, India, Belarus, Moldova and Poland.

According to Deputy Minister of Digital Transformation Oleksandr Bornyakov, around 2,500 foreigners, mostly from India and Pakistan, have already become Ukrainian e-residents.

Ukrainian e-residents will be able to pay a low, fixed tax rate of five percent. They will also have the ability to open bank accounts entirely remotely and create an electronic signature that will allow them to sign contracts and agreements from anywhere in the world.

In addition, e-residents of Ukraine will each receive an English-speaking personal manager to facilitate their transition to the Ukrainian IT world.

Low taxes

Electronic residency programs are not new to the emerging region of Europe.

Estonia launched the concept in 2014 and has since earned around US $ 63 million from the program, which allows its more than 60,000 e-residents to open and run an Estonian business entirely online. It has grown into one of the country’s flagship brands, with the kind of global recognition that startups seek.

Indeed, as a marketing tool for Estonia and its digital society, it is invaluable. Pope Francis and Bill Gates are just a few of the many international figures to hold an Estonian electronic residence.

Lithuania followed suit at the start of the year (applications opened in June) but with a (temporarily) more limited scope than that offered by the Estonian program: Lithuanian e-residents, for example, cannot open and manage companies at the moment.

Today Ukraine, with a booming IT industry and a series of governments dedicated to creating a good business environment, seeks to emulate Estonia’s successes with its own online residency program. And with very low tax rates and streamlined registration procedures, Ukraine could have a decisive advantage over its regional competitors.

Indeed, perhaps the most eye-catching element of Ukraine’s e-residency program is the tax rate.

Under this program, e-residents registered as sole traders pay only the flat rate of five percent income tax; in contrast, Estonian e-residents pay a tax of 20 percent. on distributed profits, while Lithuania has a corporate tax rate of 15 percent. cent which applies to e-residents.

According to Oleg Kopachovets, CEO of the company ProCoders, this will be one of the main elements of the program that could make people choose Ukraine for their electronic residence.

“It’s a big difference [compared to Estonia] and this could be decisive in attracting businesses and entrepreneurs, ”he says Emerging europe.

It appears to be part of a larger program implemented by the Ukrainian government to minimize taxation as much as possible, theoretically stimulating business growth in the process.

“Let us raise taxes when we have a GDP per capita of 50 to 70,000 US dollars, not four thousand,” Fedorov said. “So I am in favor of increasing taxes, but not before… our goal is to make Ukraine the freest country in the world in terms of taxation.”

Good for the IT industry

Anna Derevyanko, executive director of the European Business Association in Kiev, also believes that the program can be beneficial for the Ukrainian IT industry.

“A crucial point is the low capitalization of well-established companies in our country. Ukraine has a lot of vivid examples of so-called unicorns – like Grammarly, Petcube, Ring, But a lot of these companies are moving to Delaware or Silicon Valley… we hope these problems will be solved by a new special tax regime.

Beyond the attractive low tax rate, the Ukrainian electronic residence application process is significantly simpler and cheaper than its competitors. For the moment, the Ukrainian electronic residence application is free, compared to 90 euros for Lithuania and 120 euros for Estonia.

In addition, Ukraine also wants the processing time to be significantly shorter than its Baltic rivals: applications in Estonia and Lithuania currently take around three to nine weeks.

The Ukrainian has not yet clarified how long his own application process will take, but the Digital Transformation Ministry has been working with the Ukrainian security services to minimize verification procedures as much as possible, with the aim of make the whole process much faster than its competition.

The importance of Diia

Beyond that, according to Oleg Kopachovets, the Ukrainian system is more modern and up to date – practically anything can be done through the Diia app, which Ukrainians can already use to establish their tax status and open a business, and which e – residents will have immediate access to it.

“Ukrainian e-residents can really run their business with just a few clicks, without filling out long forms, because their information as e-residents will already be in the Diia register. Thanks to Diia, you can run your business with just a few clicks on your smartphone… with Estonia, there is a lot more paperwork.

Although Ukraine cannot provide access to European Union markets like Lithuania and Estonia do, it still has a lot to offer, with a booming IT industry and large population.

This, combined with incredibly low taxes, compensates for its drawbacks and makes Ukrainian e-residence a very attractive proposition for IT people.

“The electronic residence will contribute to the development of a positive image of Ukraine,” Fedorov said.

“It’s a great opportunity for people to open their sole proprietorship here, and in the future, maybe even a business, without physically coming to the country. According to our forecasts, we can get up to 3,000 of these electronic residents, which will bring additional income to the Ukrainian budget and, of course, create new jobs. “

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