Understanding Payroll in Ukraine: What Global Companies Need to Know About Ukraine Payroll
Ukraine has suffered much political and societal upheaval in recent years. But as the second-most populous country in Eastern Europe (home to around 44 million citizens), it still represents a promising expansion opportunity for international businesses to explore.
Three decades after gaining its independence, Ukraine has forged strong trade links with Russia to the east, and with the rest of Europe to the west. Its economy is underpinned by mining, agriculture and energy, with many companies taking advantage of labor costs that are among the lowest in Europe. Ukraine’s GDP has also grown substantially in recent years, recovering most of the productivity that was lost in the aftermath of 2014, when Russia took control of the Crimea region.
As is the case in many underdeveloped countries, setting up business and navigating rules and regulations regarding payroll in Ukraine can be highly complex. Read on to get a broad understanding of the basics.
It’s important to note that it can be extremely complicated to set up a business in Ukraine. Bureaucracy is considerable, corruption can be an issue and legislation can change on a regular basis. This makes it absolutely essential to use the services of a partner with Ukraine-specific business expertise, and to allow plenty of time and resources for the set-up process.
The limited liability company (TOV) is the most widely used method for foreign entities to start a business in Ukraine. This requires registration with the trade register, the drawing up of a company charter and the submission of information around the beneficiary owners. From there, companies should open a permanent bank account in-country (which can take 1-2 business days) and register with the state tax authority or district tax office to obtain a VAT number. There is no legal minimum requirement for share capital, although companies must make sure they have enough money to cover wage, tax and social security contributions.
Labor agreements/contracts (or civil service contracts) are required under Ukrainian law. Residents do not need a work permit in order to work in Ukraine. Non-residents have the same rights to work as residents, but must obtain work permits and residence permits in order to obtain employment. Indefinite term, fixed-term and seasonal work employment contracts are common.
Maximum working time in Ukraine is 40 hours a week, normally spread over five days of eight hours each. Shorter working weeks apply under certain labor agreements, and to workers under the age of 18. Overtime is a maximum of 120 hours per year, and no employee should work more than four hours of overtime on two consecutive days. All overtime is paid at double the normal rate.
Compensation, Bonuses and Severance
The minimum wage in Ukraine has been subject to regular and substantial increases in recent years. As of the start of 2021, the rate is 6000 hryvnias per month (approximately £155; $215; €180), but this is due to rise to UAH 6500 (approx. £170; $235; €195) on 1 December 2021 - more than four times the minimum wage rate of 2016. Paying bonuses to employees in Ukraine is commonplace and there are no restrictions on doing so within the private sector.
Notice periods are two weeks when an employee terminates their permanent employment. When an employer dismisses an employee for financial or restructuring reasons, the notice period is two months. Most probation periods are three months, and the notice period if an employee fails to pass their probation is three days. Notice periods can be waived in their entirety if employee and employer are parting ways by mutual agreement.
Severance pay is usually one month’s salary, but extends to three months if an employee is leaving due to the employer breaking the contract or Ukrainian labor laws.
Tax and Social Security
Income tax in Ukraine is levied at a flat rate of 18%, plus a ‘military tax’ of 1.5%. Non-residents working in Ukraine are taxed at the same rate, but only on income from their work in the country.
Corporation tax is also 18%. VAT runs at 20%, but the exporting of goods out of the Ukraine is exempt. Certain other goods and services are also given a reduction in the VAT rate to 7%. Employers should note that the tax reporting year follows the financial year, and that corporation tax returns for each quarter should be made within 40 calendar days of the end of that quarter (60 days for the last quarter of the year).
Social security contribution is 22% and is paid by the employer, while the employee pays 0.6% into a state fund for unemployment benefit.
Holidays and Leave
The minimum entitlement for paid leave in Ukraine is 24 calendar days, with higher rates for employees who are disabled or are under the age of 18. Employees are also paid for time off over the 11 days of public holidays each year.
Maternity leave entitlement is 18 weeks (20 weeks for multiple births) and the mother’s full salary is covered by the Social Security Fund of Ukraine. Paternity leave entitlement is two weeks, unpaid, and can be taken at any time during the mother’s maternity leave.
Sick leave for medically certified illness or injury is paid by the employer at full salary for the first five days of absence, after which the Social Security Fund of Ukraine pays between 50% and 100% of salary to the employee, depending on their length of service.
Doing business and running payroll in Ukraine can be challenging for a variety of reasons. As well as its economic and geopolitical turbulence, businesses are subject to complex, bureaucratic and frequently changing rules and regulations. To stay on top of everything and be able to focus on your core business, it’s imperative to team up with a global payroll provider who can make sense of what you need to do to achieve and maintain compliance.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.