The full-scale war changed how Ukrainian IT businesses operate. Some entrepreneurs, company owners, and IT professionals moved abroad while continuing to work with Ukrainian clients and teams. More Ukrainian IT projects are also entering foreign markets and registering companies abroad for that purpose.

After setting up a foreign company, founders often continue working with Ukrainian specialists. The reasons are straightforward: established professional relationships, no language barrier, and lower compensation costs than in many foreign markets. But cooperation between a foreign company and a Ukrainian team has tax implications that are best assessed before choosing a jurisdiction and building a corporate structure.

Depending on how the cooperation is organized, the authority given to Ukrainian specialists and where the business is actually managed, the foreign company may have a permanent establishment in Ukraine. Additional tax liabilities may also arise for its owners or the team.

This article examines how a foreign IT company can work with Ukrainian specialists, the tax risks of different engagement models and what to consider when designing the structure.

How can a foreign company work with a Ukrainian team?

A foreign IT company can engage Ukrainian specialists either directly or through a local legal entity or intermediary. The choice depends on the size of the team, its functions, and the company’s willingness to assume additional tax and administrative costs. The main options are outlined below.

Direct contracts with individual entrepreneurs

The foreign company signs agreements with Ukrainian individual entrepreneurs, who pay tax on their fees independently. No local legal entity is required. However, if Ukrainian entrepreneurs perform all the work while the foreign company has no employees or genuine presence in its country of incorporation, questions may arise about its economic substance and whether its business activities are genuine.

Contracts with individuals

Specialists who are not registered as individual entrepreneurs can be engaged under civil-law contracts, although this generally means a higher tax burden for Ukrainian contractors. If an individual regularly works under the company’s direction, the relationship may be reclassified as employment. A foreign company may also hire Ukrainian nationals directly, but it then needs to address taxation, social insurance and employer registration.

A Ukrainian subsidiary

A foreign business can establish a company in Ukraine to hire specialists and provide services to its parent company. The team can then be administered locally. If the Ukrainian company meets the eligibility requirements, it can become a Diia City resident and engage specialists under gig contracts. This model entails additional costs, proper documentation of intragroup settlements, and a clear separation of the companies’ functions to reduce the risk of a permanent establishment.

Employer of Record (EOR)

Under this model, a Ukrainian provider formally hires the specialists, acts as their legal employer, pays salaries, and remits the relevant taxes. The team works on projects for the foreign client. EOR makes it possible to hire employees without establishing a Ukrainian LLC, but adds provider fees and makes the company dependent on the provider for employment-related matters.

Contract-based outstaffing

A foreign company engages Ukrainian IT specialists through a local intermediary that arranges contractual relationships with the contractors, including individual entrepreneurs. The client signs an agreement with the provider, which handles the engagement of specialists and payments to them. This simplifies team administration but adds intermediary fees and requires careful contractual arrangements, particularly concerning the chain of title for intellectual property rights from developers to the foreign company and the allocation of liability. Legal IT Group lawyers discuss how to draft an MSA for outstaffing services in this article.

Under any of these models, the authority Ukrainian specialists actually exercise matters.

It can determine whether the foreign company is treated as having a permanent establishment in Ukraine, even without a formally registered local branch.

Can a Ukrainian team’s activities create a permanent establishment for a foreign company?

One tax risk for a foreign IT company with a Ukrainian team is that its activities may be regarded as constituting a permanent establishment in Ukraine. Under subparagraph 14.1.193 of the Tax Code of Ukraine (TCU), a permanent establishment may be a fixed place of business through which a non-resident carries on all or part of its business. Similar provisions appear in Article 5 of double taxation treaties, although the specific conditions vary by country.

A foreign company does not need its own office or a registered branch in Ukraine for its activities to be treated as a permanent establishment. A permanent establishment can also arise through a dependent agent: a person who effectively represents the foreign company and regularly exercises authority to conclude contracts on its behalf.

To illustrate the difference, consider two scenarios:

Scenario 1. Ukrainian Individual Entrepreneur (Developer)	Scenario 2. Ukrainian CTO or Sales Manager
A foreign IT company engages a Ukrainian individual entrepreneur to develop software. The specialist writes code, receives payment under the agreement, and takes no part in client negotiations or the company’s management decisions.	A foreign IT company engages a specialist in Ukraine who effectively manages client relations. They regularly negotiate and agree on material contract terms that the foreign company later signs without substantial changes, or conclude contracts on its behalf.
In these circumstances, working with the entrepreneur alone generally does not provide grounds for treating the non-resident as having a permanent establishment in Ukraine.	Tax authorities may regard this as dependent-agent activity of the non-resident, which can create a permanent establishment in Ukraine if the other statutory conditions are met.
The difference between these examples lies primarily in the specialist’s actual functions and authority, rather than their formal status as an individual entrepreneur or the wording of the agreement.

Apart from dependent-agent activity, subparagraph 14.1.193 of the TCU provides for other grounds for a permanent establishment, including a fixed place of business or the provision of services over an extended period through engaged personnel, subject to statutory conditions.

What are the consequences for the foreign company?

If the non-resident’s activities in Ukraine meet the criteria for a permanent establishment, it must register with the Ukrainian tax authorities and pay corporate income tax on the profits attributable to that establishment under paragraph 141.4.7 of the TCU.

For example, an Estonian IT company generally pays no corporate income tax on undistributed profits (0%). However, if its activities in Ukraine are treated as creating a permanent establishment, the profits attributable to that establishment will be taxed in Ukraine at 18%, even if the company does not distribute dividends.

Depending on the nature of the operations and payments, additional reporting and tax-withholding-agent obligations may apply.

Who makes management decisions, and from where, can also affect the foreign company’s tax residence.

What if the foreign company’s management is also based in Ukraine?

The situation is different when Ukraine is home not only to the team but also to the director or other members of the foreign IT company’s management. For example, a company is incorporated in Estonia, but its director lives in Kyiv, where they manage finances, sign client contracts, and make major business decisions.

That raises the question of the company’s place of effective management. Under subparagraph 133.1.5 of the TCU, Ukraine may be regarded as such a place if, for example, meetings of the company’s executive body are held in Ukraine more frequently than in another country, management decisions are predominantly made here, day-to-day operations are conducted here, or the business is effectively managed from Ukraine.

If the company also has a place of management in another country, the TCU treats Ukraine as the place of effective management if at least one of the following takes place here: management of bank accounts, maintenance of accounting or management records, or management of personnel. For an IT business whose team is managed from Ukraine, the last criterion may be met even if the director lives abroad.

What are the tax consequences?

If a foreign company becomes a Ukrainian tax resident based on its place of effective management, it must register for tax purposes, file returns and pay corporate income tax at the standard rate of 18%. However, under subparagraph 134.1.1 of the TCU, profits from sources outside Ukraine are not subject to Ukrainian corporate income tax for such companies.

The director’s presence in Ukraine alone does not automatically make the company a Ukrainian tax resident: the full set of circumstances described in subparagraph 133.1.5 of the TCU must be considered. The TCU also allows a foreign company to elect Ukrainian tax-resident status by filing an application with the tax authority. The applicable double taxation treaty and substance requirements in the country of incorporation also matter.

What about the owner’s taxes?

If the founder of a foreign IT company remains a Ukrainian tax resident, the controlled foreign company (CFC) rules may apply.

Under Article 39² of the TCU, an owner who meets the statutory control criteria must file CFC reports and, in certain circumstances, pay tax on their share of the company’s adjusted profits, even if no dividends are paid.

A foreign company that has obtained Ukrainian tax-resident status under subparagraph 133.1.5 of the TCU is not treated as a CFC, so these rules do not apply to it.

What tax risks may arise for Ukrainian individual entrepreneurs?

When a foreign IT company engages Ukrainian individual entrepreneurs directly, the entrepreneurs themselves are responsible for administering tax on their income. These entrepreneurs act as independent contractors and maintain their own tax records. This model, however, has limitations that both parties should understand.

Single-tax group

Group 3 individual entrepreneurs can provide services to foreign companies and receive payment in foreign currency. Group 2 individual entrepreneurs may provide services only to single-tax payers and individuals, so they cannot work for a foreign company. Their actual activities must also match their registered KVED business activity codes, and their income must remain within the annual limit.

Tax residence

If a Ukrainian individual entrepreneur moves abroad, they may become a tax resident of another country and incur additional obligations to declare and pay tax on their income. Moving abroad does not, by itself, mean losing Ukrainian tax residence. But if the entrepreneur does lose Ukrainian resident status, they cannot remain a single-tax payer. Under subparagraph 291.5.7 of the TCU, non-residents are ineligible for this regime.

Tax audit risks

If an individual entrepreneur performs the functions of an employee, the relationship with the client may be reclassified as employment. Tax authorities may also challenge whether services were genuinely provided if the supporting documents are inadequate. For the foreign company, the effect of such claims is usually indirect, although the risks increase if it has a permanent establishment in Ukraine.

Possible introduction of VAT

In 2026, Ukraine’s Ministry of Finance proposed mandatory VAT registration for individual entrepreneurs under the simplified tax system with annual income exceeding UAH 4 million, but as of publication, the amendments had not entered into force. The impact on those serving foreign clients would generally be less pronounced: software development and testing services provided to non-residents are generally outside the scope of Ukrainian VAT under paragraph 186.3 of the TCU, as their place of supply is determined by the recipient’s place of registration.

These restrictions matter when a foreign company chooses how to work with its team. If direct engagement of individual entrepreneurs or contract-based outstaffing does not reflect how the team actually works, employment through an EOR or a Ukrainian subsidiary may be more appropriate.

So how should a foreign company structure its operations when engaging a Ukrainian team?

There is no universal model. Even the most common approach, direct contracts with Ukrainian individual entrepreneurs, can create risks for both the specialists and the company in certain circumstances. Before choosing a structure, consider the following:

Factor	What to consider
Team members’ status and place of residence	Will specialists work as individual entrepreneurs, other independent contractors or employees, and where do they live? This affects the available engagement models and the taxation of their income.
Founders’ tax residence	If the company’s owners are Ukrainian tax residents, CFC rules may apply, including reporting obligations and taxation of profits.
Location of management	Having a director, CTO or other management personnel in Ukraine requires assessing their authority in light of permanent establishment risks and the company’s place of effective management.
Ukrainian team’s functions	Performing technical tasks generally involves less risk than negotiating or concluding contracts on behalf of the foreign company.
Physical presence in Ukraine	Using an office or servers requires assessing the risk of a permanent establishment based on the activities carried out and the company’s control over these facilities.
Requirements of the country of incorporation	Depending on the jurisdiction, there may be requirements concerning a local director, employees or genuine economic substance. Some countries also have rules against disguised employment relationships with independent contractors.
Intermediary costs	EOR and outstaffing reduce the company’s administrative workload but involve additional costs and dependence on the provider.
Team tax compliance	Under direct engagement, individual entrepreneurs meet their own tax obligations and bear the main risks. Under an EOR or Ukrainian LLC structure, the local legal entity handles the relevant administration.

Conclusions

Engaging a Ukrainian team does not, by itself, create tax obligations in Ukraine for a foreign IT company. Risks arise when functions belonging to the company itself are performed in Ukraine, such as negotiating and concluding contracts, managing accounts or personnel, or directing the business as a whole. This may lead to a permanent establishment or even Ukrainian tax residence for the foreign company, as well as CFC obligations for a founder who is a Ukrainian tax resident.

The engagement model should reflect how the team actually operates: who makes decisions, who deals with clients, where the specialists live, and whether their status as individual entrepreneurs is consistent with the work they perform.

If you are planning a structure involving a Ukrainian team or want to review an existing one, contact Legal IT Group.

We will assess the engagement model, evaluate the tax risks for the company, its owners, and specialists, and propose a structure that reflects how your business actually operates.