A private entrepreneur (PE) in Ukraine is a business entity that is entitled to perform work or provide services as an independent contractor.
When registering as a Private Entrepreneur, one should select the types of activities and the applicable tax system.
Any legally capable individual, regardless of citizenship, may register as a PE in Ukraine. The place of residence of the individual within Ukraine does not affect the location of registration as a PE. Therefore, one may register with any registrar in Ukraine (either at a notary’s office or the administrative services centers). Registration takes up to 24 hours after submission of the documents.
Moreover, one may register as a PE online: the applicant shall have the electronic digital signature in this case.
Taxes for PE
PE runs the business under the selected taxation system: general or simplified.
The general taxation system provides for the payment of 18% net income tax. Besides, the PE has to pay 1.5% of the military tax and 22% of the single social contribution to the Pension Fund from net income. Registration as a VAT payer is mandatory if annual turnover reaches 1 000 000 UAH (in Ukraine, VAT is 20%).
The simplified taxation system provides for the payment of a single tax depending on the selected single tax group and is applied with restrictions on activities (the latter means that some activity types are prohibited for taxation under the simplified system). Consequently, a PE can choose one of the four groups of the single taxation system:
1) PE of the first group pays a fixed tax (210 UAH per month in 2020), provides only retail sales of goods or household services to the population, has an annual income of up to 1 000 000 UAH and no employees;
2) PE of the second group pays a fixed tax (944 UAH per month in 2020), sells, produces goods, provides services (performs work) exclusively to the population and / or payers of the single tax, has an annual income of up to 5 000 000 UAH, and no more than 10 employees. Such PEs can work for / provide services to business entities who use the simplified tax regime or only to individuals;
3) PE of the third group has annual income up to 7 000 000 UAH, no restrictions on the number of employees, and pays a single tax of 3% of income (for VAT payer) or 5% of income (for non-VAT payer).
4) PE of the fourth group – farm owners whose tax rates depend on the type of land.
PEs usually tend to choose the third group of single tax, which allows them to conveniently keep records, perform work and provide services to any legal entity or PE and export services (goods, works).
Please take into consideration that restrictions exist in the form of payment for single tax payers: it can be made exclusively in cash (cash and / or bank transaction).
Additionally, the single social contribution to the Pension Fund at the rate of 22% of the minimum wage (that is 1039,06 UAH in 2020) shall be paid monthly.
Worth noting, if a PE receives payments in cash (POS-terminals are also considered as cash transaction) and the amount of income is over 1 000 000 UAH, a special cash-register machine shall be installed.
The major fact against doing business as a PE is that PE is liable with all his property.
PE vs Employeе
A significant number of companies, especially IT companies, in order to optimize the tax burden, often use a scheme, according to which a certain specialist is engaged to work as a PE instead of being hired as an employee. At the same time, the employer significantly reduces the tax burden and avoids certain obligations imposed over him by labor law (vacation, decree, guarantees of dismissal, etc.).
There is a risk that the relationship between the person and the company will be recognized as a de facto employment relationship. And, consequently, result in fines for the ‘employer’.
It should be noted that the legislation on the activities of PE is changing. The procedure for registration and the taxation system for PE are permanently simplified and improved. Frequent changes occur in taxation, the use of special cash registers implemented.
Various initiatives lessen the impact of the PE on reducing budget revenues, for example, several of the recently announced:
● to approve the criteria that would establish the actual employment relationship between the PE and the company;
● on the introduction of the fifth group of the simplified tax system for IT professionals (that provides a slight increase to 5% tax rate for PEs in IT, 1,5% military fee, and a higher social tax rate (22% of the two minimum salaries, in 2020 the amount equals to 2078.12 UAH) and special contribution to the development fund, increasing from 1% in 2020 to 5% in 2024 annually);
● to prohibit PEs from providing any services (in this case, the schemes of avoiding employment relationships will cease to exist).