Setting up an R&D center in Ukraine

“Help me register a legal entity”. That’s what clients usually ask of us when planning to open an R&D center in our country. Most of them are representatives of foreign companies or Ukrainians opening an R&D center on behalf of a foreign company.

After a brief conversation, we usually find out that a simple sole proprietorship would do the trick. There are, of course, certain details that you should consider when opening an R&D center. Let’s jump right into it.

Why foreigners might want an R&D center in Ukraine

In IT, R&D (research and development) center is a team that develops software for a company and is essentially a part of that company. 

Why do foreign companies open R&D centers in Ukraine? Let’s be honest here – they do it to reduce the cost of human resources. Here they are able to get skilled professionals for less. Most of them have worked with Ukrainians in the past, under outsource or outstaff contracts, and realized they could cut down on the overhead costs of hiring another company.

With the issue of price so important here, it’s best to pick the legal structure that won’t require unnecessary expenses but will still be able to meet your company’s needs. 

Example 1. 1-7 developers working from home

Even if you intend to expand to a workforce of 50-100 within a year, you should start with sole proprietorships. What you do is get registered as an SP yourself (if you aren’t one already) and sign contracts with other SPs – the devs you need.

The company that initiates the process often has templates of such contracts ready. Make sure they don’t contain any signs of labor relations. Under no circumstances should they mention sick leave, vacation, medical insurance, etc., since you’ll be dealing with SPs. They are essentially contractors that provide you with certain services.

In every other aspect this can be a simple agreement on the provision of services – with the rights and obligations of the parties, clauses on liability, confidentiality, and transfer of IP rights, non-compete clause, etc.

You should also provide for the transfer of any devices and equipment that your devs might require.

Example 2. Under 10 developers working in an office

For those who see their R&D center as an office, the best option right now would be a coworking. This option is the safest; it will protect you and your contractors from any flak by the State Labor Service or tax authorities concerning hidden labor relations.

You’re going to need a SP who will act as the coworking operator, assuming the responsibility of organizing workplaces and work space as a whole. Your developers will be paying for these services themselves. Follow this link to learn more about this type of arrangement in IT.

Our advice for signing contracts with contractors and providing them with equipment (if necessary) is the same as in the prior example.

If you need help with structuring your business, message us here. 

Example 3. You already have a team of 10+ developers

This mostly applies to large international companies seeking to open a representative office in Ukraine. By the time they are ready to proceed with creating an R&D center, they have either found the people they need already, or have acquired an IT firm that they are going to use as a basis for their R&D center.

This is where we do what most people think of first in a situation like this. We register a legal entity. We hire employees, complete with salaries and benefits.

Of course, only big and stable companies, often product-based ones, can afford this. Everyone else will find little value here. That’s because HR costs (42% of income) will undo any economic benefits.

Will Diia City affect R&D centers in Ukraine?

Actually, if Diia City does launch and the government sticks to its promises, joining could be pretty attractive to LLC R&D centers, which are currently paying 42% tax for using hired workers. As Diia City residents, they would be paying only 6.5% for the same team working under the same terms. 

Find out more about the risks and benefits of joining Diia City here.

Is it really that easy to open an R&D center in Ukraine?

Yes and no. Good old sole proprietorships are indeed the best way to start here.

However, poor legal structuring or inaccurate calculations could have you facing an 18% income tax as a permanent representative of a foreign company in Ukraine – even if it isn’t true.

Also, when opening an R&D center, you need to pay close attention to the issue of providing your contractors with equipment, to make sure they won’t be able to just run off with your property. These things cost a lot after all.

Experts usually find a tailored solution for each particular situation, in order to ensure optimal tax planning and business security.

Opening an R&D center in Ukraine has plenty of other nuances, and there is no single, clear-cut advice that would fit them all.

So pay attention to details when growing your business, and it should be running smoothly.