Ukrainian IT businesses are often represented by several individual entrepreneurs (IEs) who work as independent developers but sometimes perform functions of hired workers. Therefore, the Ukrainian state labor and tax authorities have questions for them. In recent years, we have seen an increasing desire on the part of the Ukrainian government to strengthen control over the IT industry (and partial success in doing so).
Changes in tax legislation, the ratification of international data exchange systems, and the launch of Diia City all have significantly narrowed the possibilities for the development both of the IT sphere in general and for some entrepreneurs in particular. Today, we recommend everyone reconsider their business structure and, if necessary, quickly restructure their business. The best option now and for the foreseeable future is the coworking structure.
Read on to learn how coworking helps you safely operate an IT company in Ukraine and neutralizes the risk of claims on the part of auditors.
How coworking works for IT
Say your neighbor or some businessperson wants to create a coworking space and cooperate with IEs who happen to fulfill your orders. This entrepreneur rents premises, creates workspaces, and provides amenities: a dining room, bathrooms, conference rooms, rooms for public events, etc. IEs (developers) then sign contracts to access the infrastructure of this entrepreneur’s coworking space. They show up on time and work calmly.
This organization of work disallows questions from auditors about the branding of facilities, equipment, stationery or, for example, backpacks with company logos for those working in the coworking space. All of these things should be included in the contracts for renting workspaces.
Advantages for IT business workers in cooperating with coworking spaces
1. The State Labor Service will not be able to blame you for concealed labor relations. It often happens that an employee works in an office of an IT company without an official reason for being there. IEs should have contracts regulating their work in coworking premises.
2. Tax officials will not suspect you of tax evasion. The coworking space operates as a separate independent and transparent business. IEs have agreements with their customers, and the sources of income for the coworking space and the entrepreneurs working in it have nothing in common.
3. Suspicions about unified branding of the working space are diluted. At first glance, inspectors may assume your coworking looks like an office of a particular company. However, the owner of the coworking space can easily dilute such suspicion by providing a contract concluded with the owner of the trademark to promote the trademark among clients (IEs who work in the coworking space).
However, there are also shortcomings of the coworking model
The biggest disadvantage of structuring an IT business in the form of coworking is additional time and financial investments.
- You will have to register another IE or create a company (a legal entity) and bear the tax and other financial liabilities for that entity.
- If the coworking space is large, its manager will have to hire personnel for its operation.
Our experience shows that these resource requirements are always justified. They negate the risks of large fines imposed by tax and labor authorities. Coworking will put your business in order. Learn more about structuring your business this way at the link.
Coworking for IT is even more relevant in 2021
In 2021, Diia City will likely start its operation as a special legal regime for IT companies. It involves, among other things, lower taxes on wages than IT companies currently pay. However, these taxes are still higher than the 5% paid by IEs.
Diia City does not look so threatening to coworking
Informally, everyone understands that Diia City is being created to make IT businesses pay more taxes. Ukraine already has enough tools for this. However, they are not widely used so as not to strike a devastating blow to the IT sphere as a whole — in doing so, the state would lose a lot of revenue. Diia City was another compromise to bring part of the IT industry out from the shadows and in this way to expand the list of taxpayers.
In light of this, we expect an increase in the number of inspections of IT businesses that have not transferred to Diia City. The very spirit and values of the bills on Diia City seem to say that it’s time to change the legal structure for all who work with IEs according to the current schemes.
Cooperation with a coworking space is now the best alternative if you do not plan to play immediately under the new rules suggested by the state. In case of any business inspection, when asked “Do you work for this company? an IE may safely answer “No, I am an independent entrepreneur who came to work in a coworking space. Here are my documents for confirmation.” To further discuss coworking for IT with one of our lawyers, follow the link.
Changes in legislation hint at the creation of more coworking spaces
In 2021, the limit on non-residential space that can be rented out by unified taxpayers of the third group was increased from 300 to 900 square meters. This is important for large IT businesses and coworking operators who plan to work in spacious facilities. Previously, when having a coworking space with a total area of 300 square meters or more, an IE had to move to the general system of taxation and pay 18% of net income.
In some ways, this makes coworking look even more profitable because of the ability to reduce the tax base by costs. At the same time, entrepreneurs subject to the general taxation system are much more often inspected by various regulatory authorities. If earlier three IEs were required to create a 900-square-meter coworking space, now it can be created by one friendly entrepreneur.
The long and the short of coworking in IT
Today, many Ukrainian IT businesses consist of a number of IEs. This allows for optimizing the tax burden and removes a number of restrictions on the development of companies. This use of IEs has been bothering the Ukrainian state for a long time, and the state keeps making attempts to start collecting at least a little more in taxes from the IT sector. This time, there is a high probability of their success given the launch of Diia City, the global trend towards data disclosure, and faster changes.
In response, many IT companies are now choosing the coworking structure, which allows them to protect their businesses and profits. Learn more at the link.