Ukrainian entrepreneurs who deal with companies and receive income from them, should know that at the earlier in February 2019 another bill was introduced in the Verkhovna Rada called On Amendments to Certain Legislative Acts of Ukraine Concerning Strengthening the Protection of Employees’ Rights and Countering the Use of Undeclared Labor.
At first glance, everything seems to be clear: the government finally wants to get rid of wages “in envelopes.” Thus, there should be a country where there will be social guarantees for workers and proper documentation of employment. Of course, the state treasury will be replenished due to each official personal income tax of 18% and a military fee of 1.5% collected from every official salary.
But what does it have to do with FOPs?
The whole problem is that, according to the new bill, the employment relations may be those recognized relations that are documented with entrepreneurs and qualify for at least three of the seven possible criteria:
- a person is given periodical (two or more times) remuneration in cash or in kind for the work performed (services provided) in the interests of another person;
- personal performance of work (provision of services) by a person with the specific qualification, profession, position on behalf of and under the control of the person in whose interests the work is performed (services are provided), or by such person’s authorized representative;
- remuneration for the work performed (services provided) is the only source of income for a person or is 75 percent or more of such person’s income for 6 calendar months
- work is performed (services are provided) by a particular person, in whose interests works are performed (services provided), or by an authorized person in the workplace in compliance with the rules of internal labor regulations;
- the person performs work (provides services) similar to that performed by full-time employees of the employer;
- organization of working conditions, in particular, the provision of means of production (equipment, tools, materials, raw materials, workplace) is ensured by the person in whose interests the work is performed (the services are provided), or by an authorized person;
- duration of working time and rest time is set by the person in whose interests the work is performed (services are provided), or by an authorized person.
IT-related FOPs may be particularly affected
Although the Ukrainian President “put an end to this bill” recently, it is not clear whether they will return to this issue again. Therefore it is better to understand how this bill could affect FOPs in IT
It should be noted that it was the IT industry that raised the level of GDP in the whole country in 2018 by 3.3%, which is UAH 10 billion for the state budget.
The problem is that the provision of services from such entrepreneurs will be recognized as labor relations. In this case, the customer will have to pay 19.5% for such an entrepreneur, instead of FOP paying 5% of income for themselves. And this difference is huge!
Although, if you look into it, every second business entity can be considered an employee, based on the suggested signs of an employment relationship. For example, you are a Sole Entrepreneur who personally performs the work (renders services) to the customer, you receive payment from them for 6 months and the total income from one client is at least 75% – then you are not an entrepreneur, but an employee! Unfortunately, if this bill is adopted, a case like this will become a reality.
We believe it is impossible to compare all FOPs. After all, not all entrepreneurs are employees. First of all, they are entrepreneurs. And in conditions of not so small tax rates, they try to have a small business. Not every person wants to be an employee. And it is the FOP system that enables entrepreneurial activity.
The main task of the government is to find a compromise and look for another way to identify unscrupulous employers, and not to destroy small business in the form of entrepreneurship.
If you have any questions on this matter or need advice – please contact us.