Ukraine’s tax system and investor incentives
Editor’s note: The views and opinions expressed herein are those of the interviewees and do not necessarily represent the views and opinions of the Kyiv Independent, KPMG International Limited, or any KPMG member firm.
At first glance, Ukraine's tax system can appear straightforward. And in many ways, it is, with the same handful of taxes you'd expect to find in most countries.
But look beneath the surface, and it's not the number of taxes, but the exemptions and rules associated with each one that can add complexity.
"On the surface, it's not that complicated, but then when you go into each of them and you try to see in which cases they apply or don't apply, this is where you get all the use cases," said Vitaliy Radchenko, managing partner and head of energy & climate change at CMS Ukraine.
That's why anyone working in the tax field in Kyiv is likely to tell you that hiring local tax advisers is your best bet. Sure, it may be in their best interest to say so, but understanding how the rules work in practice can be as important as knowing what the rules say on paper.
That complexity can matter even before a foreign investor gets to Ukraine's domestic tax rules. "In Ukraine, strong treaty relief can be the difference between a viable and a marginal project, especially for groups routing investments through regional hubs like Poland, Romania, Czechia, or the Netherlands," says René Schöb, head of Tax & Legal at KPMG CEE.
Tax advisors can also be useful in figuring out which incentives are available to investors — some of which have been introduced since the start of the full-scale invasion to help spur much-needed investment.
"Large investment projects — particularly those focusing on energy efficiency — can access valuable tax incentives, such as the opportunity to import equipment and machinery at reduced or even zero customs duties," said Sergii Popov, head of tax & legal at KPMG in Ukraine.
However, despite incentives and favorable rates, the practical administration of taxes can still be challenging. According to Popov, investors often face a difficult compliance process, with broad interpretations of tax rules by the local tax authorities resulting in extra scrutiny and pressure. Without guidance, understanding the administrative and judicial systems in Ukraine governing what seem like simple tax matters can become more complex and time-intensive than is necessary.
And the rules of the game are constantly changing. Investors need to pay attention to how local law enforcement is implementing reforms, says Vasyl Orieshkin, a Kyiv-based lawyer. Foreign investors might not always choose the best partners, and when those counterparties become the subject of regulatory, commercial, or reputational scrutiny, this extra attention can also extend to the investors associated with them.
Reforms indicate that things are moving in a positive direction, however. Depending on the industry involved, for example, the Ukrainian government is currently investigating different means to streamline taxation and hiring arrangements, said Andriy Tsymbal, managing partner at KPMG Ukraine.
"Investors require clear, practical guidance to navigate the legal, tax, regulatory, and deal advisory landscape," says Tina Zetterlund, chief operating officer at KPMG EMA. "The good news is that as Ukraine advances its EU alignment, investor interest is growing."
Still, further progress is needed to help the Ukrainian market become more accessible and transparent for foreign investors — an issue that is becoming increasingly urgent as the country enters a critical phase of reconstruction and recovery.
This latest investment guide, produced in collaboration with KPMG Ukraine Gateway, offers answers to some of the most commonly asked questions that foreign investors have about Ukraine’s tax system, answered as plainly as possible. The following questions and answers are based on interviews with the above-referenced individuals, as well as the Kyiv Independent's own research.
Foundational
Do I need to set up a Ukrainian company to invest or do business here?
Usually, yes — though not always. The need to have an official presence in Ukraine, as well as the specific type of presence, typically depends on the type of investments or business activities a company or an individual intends to perform.
For example, a foreign company can operate in Ukraine as a non-resident: you don’t automatically need to establish a Ukrainian company. Companies can also employ people in Ukraine directly, although this may create tax obligations in both countries, which are usually managed through relevant tax treaties.
However, a “permanent establishment” is typically generated when local employees work for a foreign employer. A PE is a form of “tax fiction,” enabling a country to tax a foreign company’s activities within its jurisdiction. Such arrangements typically attract registration requirements, as well as the need to file accounts based on which profits are attributable to the relevant activities in that jurisdiction.
As such, it is definitely necessary to consider potential PE risk for non-residents when employing workers in Ukraine. In practice, most foreign investors are advised to establish a Ukrainian LLC because it simplifies taxation, licensing, contracts, and jurisdiction. In defense tech, for example, import licensing is much harder to secure as a foreign entity, making a local entity almost essential.
Even if the company has little or no activity initially, establishing at least a small Ukrainian entity with a director/accountant can be worthwhile. Accountants can also be contracted.
Are there special tax regimes in Ukraine, and how do I register?
Yes — there are two special tax regimes of note (which we will describe in more detail in the eighth installment of the Investor’s Guide to Ukraine).
The first is Diia City which covers software/IT companies (development, R&D, IP) and is where most sizable IT firms in Ukraine are enrolled.
Diia City
Tax benefits for Diia City are subdivided into two parts:
Part 1: Registration as a Diia City resident allows a reduced 5% PIT to be applied, as well as the minimum Unified Social Contribution for salaries paid to employees.
Part 2: Diia City also potentially allows companies to opt for a special CIT regime, with a reduced 9% CIT for dividend distributions and other payments that the Tax Code of Ukraine considers distributions of income (similar to an exit capital tax).
Defence City
The second special tax regime in Ukraine is the newer Defence City. Launched in January 2026, qualification for Defence City is narrower: you need an existing Defence Ministry contract to qualify, not just a product.
Tax benefits for Defence City residents include:
- CIT exemptions if the relevant requirements are met.
- Exemptions from land, property, and ecological taxes (again if the company meets the relevant requirements).
- Certain simplified customs procedures.
You register for either regime by application through online portals. However, the process isn't necessarily available in English, so you'll likely need Ukrainian-language support.
What are the main types of business entities foreign investors use?
Most foreign investors default to a single option — the LLC — with a few sector-specific exceptions:
- LLC (limited liability company) — the standard choice. Register a Ukrainian LLC and operate under the general corporate tax system (18% profit tax). Unless your sector requires something else, this is the most appropriate path.
- Joint venture — an option when partnering with an existing Ukrainian entity, though less common for a straightforward foreign-investor setup.
- FOP — generally not the structure foreign investors use for their own business presence. As discussed earlier, FOP arrangements are built for individuals (freelancers, contractors, small-scale self-employment), not corporate investment. However, FOP employment matters indirectly, as FOP arrangements are commonly used to pay contractors within a Ukrainian operation.
Many investors must also decide where they want to hold their Ukrainian investment from — i.e., if they need a foreign holding company sitting above the Ukrainian LLC in a jurisdiction with a double-tax treaty. This can be complex and not without its own issues: the Ukrainian tax authorities may challenge the “beneficial owner” status of a business seen to be trying to take advantage of “favorable” double-tax arrangements.
This means closer examination of who the non-resident recipients of Ukraine-sourced income actually are. Investors need to consider these potential beneficial owner issues for structuring purposes. As such, the location of incorporation may matter less than the form.
What is the difference between Ukraine's simplified and generalized tax systems?
In essence, the main differences between the general and simplified tax system are as follows:
The general tax system applies the following taxes
- Legal entities: general 18% corporate income tax (CIT), applicable to net income (subject to CIT adjustments).
- Individuals: general 18% personal income tax (PIT) and 5% military tax.
The “simplified” tax system, meanwhile, can offer the following benefits:
- lower tax rates
- simplified tax reporting obligations
However, there are limitations on how, where, and who the simplified tax regime may be applied to, including limits on the types of activities, amount of employees, and income thresholds. Given these specific requirements, such a system may be better for start-ups or small businesses finding their footing in the Ukrainian market.
Explaining the difference between the two systems in more detail involves answering two questions: what legal form the money is moving through, and which tax regime applies to that form.
Legal forms:
- Employee — automatically taxed on salary under the general system. No choice involved.
- Self-employed entrepreneur (also known as “FOP” in Ukraine) — the country's version of a freelancer or contractor, with lighter taxes and reporting than a company.
- LLC — a registered company.
FOPs and LLCs each choose between two regimes:
General — the default for anyone who doesn't qualify for or choose the simplified tax regime. Taxes net profit (income minus documented expenses), with heavier bookkeeping. FOPs pay 18% personal income tax (PIT) + 5% military tax on net profit. LLCs pay 18% corporate tax on net profit — and dividends to founders are taxed again individually.
Simplified ("Single Tax") — a flat rate on revenue, with lighter reporting. More often than not, FOPs pay 3–5% of their revenue up to an annual threshold (see below for more details). The simplified tax regime also provides for lower military tax rates.
LLCs can also use the simplified regime, at separately calculated rates and thresholds.
The simplified tax regime provides for single tax payment, depending on which group of the simplified tax regime applies. These groups are:
- First group: provides for payment of fixed single tax amounts (up to 10% of an official minimum salary per calendar month). Only applies to individuals. Most relevant for micro-entrepreneurs with no employees involved in market trade and household services.
- Second group: provides for payment of fixed amounts of single tax (up to 20% of an official minimum salary per calendar month). Applies to individuals/sole proprietors of businesses up to 10 people. Most relevant for retail, manufacturing, restaurant, consumer services, and freelance workers.
- Third group: provides for single tax payments of either 3% (if VAT registered) or 5% (if not VAT registered). May apply to individuals/sole proprietors and legal entities with no limit on the number of employees. Most relevant for individual entrepreneurs who need more flexibility and need to scale operations, such as medium-sized businesses and IT workers.
- Fourth group: provides for single tax payments based on the amount of land plots used and is therefore only applicable to legal entities involved in agricultural production. Applicable to individuals registered as sole proprietors who qualify as farmers according to the Tax Code of Ukraine, as well as legal entities with no employees where at least 75% of their income is derived from agriculture.
Based on these arrangements and limitations, you can already see that the first group and second group of the simplified tax system are more applicable to individual entrepreneurs (FOPs) performing limited types of relevant activities, while the third group is the most common for FOPs.
- Why it can be complicated: Simplified taxation is popular partly for its simplicity, and partly because some companies take advantage of such arrangements to structure around payroll — paying someone as a FOP contractor instead of hiring them as an official employee, since FOPs cost companies less and take home more of their pay.
However, if contracts with FOPs or self-employed contractors are used to obscure formalized employment relations, then companies under tax audit run the risk of these contracts being requalified as formal employment contracts. This means the assessment of additional tax liabilities, as well as relevant penalties from the local tax authorities.
As such, picking the right legal form and applying it appropriately can be trickier for the uninitiated than at first glance, says Raluca Enache, head of KPMG’s EU Tax Centre at KPMG in Romania.. Enache advises that “the legal form chosen should always reflect the economic substance of the arrangement,” with investors guided by local advice regarding the practicalities of their intended business.
Employees are taxed at a flat 18% PIT + 5% military tax on gross salary, withheld by the employer — who also owes 22% Unified Social Contribution on top (capped). Direct employment is the standard legal route and usually the cheapest long-term, but it means handling payroll, withholding, and compliance yourself.
That's why a lot of investors don't start there. Many use an HR agency or Employer of Record (EOR) when first entering the market. This costs more, but someone else deals with the admin. These investors can then switch to direct employment once they've got local infrastructure in place.
Do I have to pay Ukrainian tax if I'm working remotely from Ukraine?
It depends on your setup. If you're in Ukraine working for a foreign employer with no local entity, this can trigger a "permanent establishment" — meaning Ukraine treats your employer as having a taxable presence here, especially if you sign contracts or otherwise do business on their behalf. Separately, standard U.K./U.S./EU visas only allow 90 days within any 180-day period. Staying longer requires a legal ground, usually a local contract or other official recognition of your employment in Ukraine.
Nonetheless, as we’ll explore elsewhere, if a non-resident individual receives income for working in Ukraine (including employment income from non-resident employees), then such income would typically be subject to the full 18% personal income tax and 5% military tax as locally sourced income from a Ukrainian tax perspective.
A non-resident individual would also need to observe Ukrainian tax compliance obligations. This involves submitting a tax return and paying tax liabilities. However, this may also be mitigated under the relevant double taxation treaty on a case-by-case basis (again, something we’ll discuss later).
In any case, the most straightforward (and most advisable) arrangement is for an employer to set up a Ukrainian entity and hire individuals locally.
Setting up/structuring
How do I register myself or my business as a taxpayer in Ukraine?
For an individual, registering yourself or your business as a taxpayer currently requires an in-person visit to the tax authority in Ukraine. If you do not speak Ukrainian, you will need a lawyer or translator to accompany you. Banks, on the other hand, often allow video ID, so opening an account with a Ukrainian bank is easier than the tax registration itself.
For companies, as a rule, general tax registration as a taxpayer is automatically applied when company is registered in the Ukrainian company register (the EDR).
However, tax registrations for non-residents with a permanent establishment in Ukraine are not registered automatically and need to be registered separately, similar to other tax registrations (e.g., VAT registration, single tax registration, special CIT regime for Diia City Residents). These usually require separate applications to be submitted to the tax authorities, though a taxpayer can opt to submit the relevant application either in person or electronically in most cases.
Is there a tax treaty between Ukraine and my country that prevents double taxation?
Most likely, yes — Ukraine has more than 70 double taxation treaties (DTT), including one with the U.S., though it is worth checking if an agreement is still pending ratification (as is currently the case for Spain) or parliamentary approval (in the case of Australia).
Double taxation treaties matter most for withholding tax: dividends repatriated from Ukraine face a 15% withholding tax by default, but a treaty can reduce that, often to 5%. Ukraine has also revised many treaties and now exchanges information directly with foreign tax authorities to check treaty benefits are used legitimately.
How do I become a tax resident, and why would I want to?
Any foreign individual planning to receive income in Ukraine — whether as an employee, FOP, or in another capacity, like sitting on a company's supervisory board — needs a taxpayer ID (RNOKPP) first, regardless of residency status. This can typically be obtained by an authorized representative under power of attorney, without appearing in person.
Note that getting an RNOKPP doesn't itself make you a tax resident — residency is assessed separately, based on factors like time spent in Ukraine and where your center of vital interests lies.
The Tax Code of Ukraine provides for a multi-tier test for recognizing an individual tax resident in Ukraine. In general, though, an individual is recognized as a tax resident if they have a place of residence in the country.
If an individual is recognized as a tax resident under Ukrainian legislation and legislation of another state, then the appropriate tax residence status needs to be determined according to the relevant DTT.
What are my options for hiring people in Ukraine, and how does tax differ between them?
There are four main ways to recruit someone, each with a different cost and tax picture:
- Direct employee — taxed at 18% + 5% (military tax) on their salary, plus the employer pays another 22% on top for social security, up to a cap. (See: simplified vs. general system, above.) This is the standard, legally straightforward way to hire someone long-term, and usually the cheapest option over time — but you're the one handling payroll and paperwork.
- HR agency or Employer of Record (EOR) — a third-party company formally employs the person for you; you just pay them a fee that covers the person's pay, taxes, and their cut. Easier for you since they handle the admin, but more expensive. A lot of investors start this way when they're new to Ukraine, before hiring their own local team.
- Contract with a FOP (a self-employed contractor) — the FOP pays their own taxes (3–5% flat, or the higher general-system rate on profit). (See: simplified vs. general system, above.) Cheaper for you, which is why it's so common, but it's meant for genuinely independent work. If the setup looks too much like “real” employment (i.e., set hours, close supervision, working as part of a team), then it risks being reclassified as employment.
- Contract with an individual who isn't a FOP — you still withhold the same taxes as you would for a direct employee, so the cost ends up about the same as that option. The difference is, this person doesn't get the legal protections employees have. Because of that trade-off, this route is not often used, only when there's a good reason for it.
- Gig contract — only available to companies registered with Diia City (Ukraine's special tax regime for IT companies). Taxed at a lower flat rate, making it the cheapest option — but only IT firms in that program can use it.
Remember, if self-employment or FOP contracting is seen as hiding the true nature of an employer/employee relationship, the contract requalification and penalties from the local tax authorities can be costly.
Ongoing Tax Obligations
How does value-added tax (VAT) work in Ukraine, and does it affect me as an individual and as a company?
The regular VAT rate on most goods and services sold in Ukraine is 20%, and by default 20% on imports too (although some exemptions apply — see below). A reduced 14% VAT applies to supplies of certain agricultural products, however, and reduced 7% VAT applies to supplies of certain goods (e.g., medicines) and cultural services.
Paying VAT on Goods and Services
For individuals, as with most VAT systems, VAT on purchased goods is built into the price you pay rather than something you file yourself.
VAT credit for companies, meanwhile, may only be recognized based on VAT invoices registered in the state VAT Register. Generally, a VAT payer needs to use the purchased goods and services in its VATable activities to be entitled to VAT credit. While a VAT refund can be claimed, VAT credit can also be offset against VAT liabilities for the current or future reporting periods (i.e. months).
Selling goods/services subject to VAT
FOPs/legal entities must register as VAT payers if the total value of supplied goods and services exceeds Hr 1 million within any 12-month period. The VAT reporting period is one month, and VAT in Ukraine is administered electronically; i.e., VAT returns may be submitted only electronically. A VAT payer must also register VAT invoices in the Unified Register of VAT invoices in relation to the applicable goods supplied and/or services provided.
What tax exemptions exist?
The tax code's VAT section lists current exemptions — notably, imported energy generation equipment is currently VAT-free to support grid investment, like wind turbines, for example.
The list of VAT-exempt transactions is stipulated by Article 197 of the Tax Code of Ukraine, including VAT exemptions for social services (e.g., education, healthcare).
Subsection 2 of Section XX of the Tax Code of Ukraine also includes temporary VAT exemptions. For the period of martial law, for example, VAT exemptions have been introduced for military-related supplies, with such exemptions dependent on the types of goods, the specific end recipient of the goods (e.g., the Armed Forces of Ukraine), whether the supplier is fulfilling a state military procurement contract, and other requirements.
(See also: Are there special tax regimes in Ukraine? — Diia City and Defence City function as broader incentive regimes, not just VAT carve-outs.)
How is income taxed if it comes from outside Ukraine (foreign-sourced income)?
In short, it's not about where your income comes from — it's about what kind of income it is. Ukraine taxes both local and foreign income pretty much the same way.
For individuals, the standard rate is 18% PIT plus 5% military tax — same as anything else. Some types of income get a break, though: foreign dividends, for example, are taxed at a lower 9% PIT (still plus the 5% military tax).
For companies, the situation is simpler — 18% corporate tax on your profit, whether that profit was made in Ukraine or abroad.
As already noted, though, double taxation treaties play a major role in how cross-border income is allocated and taxed, so proper guidance should be sought out if you want to apply for such arrangements.
Is Ukraine's tax system complicated?
By sheer number of taxes, not especially — the main ones are corporate profit tax, VAT, withholding tax, and payroll taxes (itself a collective term covering several sub-items). Add in local taxes (set by regional authorities according to limits outlined in the Tax Code of Ukraine), like hotel tax, property tax, tourist tax, and land tax, and that's most of the list.
The complexity shows up in the rules and exemptions around each one — not the number of different taxes. Corporate profit tax alone has pages of rules on what counts as a deductible expense. VAT depends heavily on what's being taxed and whether the buyer or seller is a Ukrainian resident or non-resident. Multiply that across every tax type, and the real complexity is in figuring out which rules apply to your specific situation — which is exactly what the rest of this guide, and a good local advisor, are for.
Risk and compliance
Has the war and introduction of martial law changed any tax rules in Ukraine?
Most of what's changed for foreigners since the start of the full-scale invasion has more to do with National Bank of Ukraine currency restrictions than taxation itself — notably, the NBU's cap on dividend repatriation, which currently stands at 1 million euros per company per month. The NBU is likely to gradually lift the cap rather than all at once — but it's unclear at this moment when that will happen.
How do I file my taxes in Ukraine? And what are the penalties if I get it wrong or file late?
To file and pay your taxes in Ukraine, a Ukrainian subsidiary would usually need either an internal or outsourced accountant, and all accounting has to be done through Ukrainian-language systems.
While, under the general rule, accounting and tax reporting obligations are considered the responsibility of the director of a legal entity (unless you have an accountant), a company accountant is required by law in certain cases, specifically in the case of public interest entities (e.g., banks and financial institutions, medium and large enterprises, public joint-stock companies, entities engaged in extractive industries, etc.) This requirement also applies to local branches of international companies.
Penalties for late filing vary widely depending on what's being filed. Standard tax returns carry relatively modest fines, typically ranging from Hr 340 to Hr 1,020 ($8–27). But specialized reporting is a different story: late submission of controlled foreign company (CFC) reports can bring penalties of up to Hr 166,400 (~$3,700), and late transfer pricing documentation can go as high as Hr 665,600 (~$14,800), depending on the type of documentation involved.
Should I be concerned about who I work with locally, from a compliance standpoint?
You should be mindful — risk can come from your local counterparts, not your own conduct. If a partner draws scrutiny from the Bureau of Economic Security (known in Ukraine by its Ukrainian acronym, BEB) or the Security Service of Ukraine (SBU), that scrutiny can trace back to whoever funded them, simply as the source of money.
By way of an example, developers have historically structured as FOPs (paying around 5%) instead of operating under the general system (18%), even at a scale that doesn't fit the simplified system's intent. The Bureau of Economic Security is now actively re-examining this situation.
Takeaway: enforcement priorities shift, especially as reforms are pursued, so it’s worth staying up to date on what changes are happening that could affect law enforcement activities.
What are the most common mistakes and misconceptions foreign investors make about taxes in Ukraine?
The most common mistake, according to Radchenko, is setting up a company before thinking through how money will actually flow out of Ukraine — dividends, structure, tax exposure — and then having to restructure or unwind it later, which is worse than getting things right from the start. Advisors sometimes give generic advice that misses risks specific to a particular business, and cost-cutting on registration can mean skipping over real ongoing obligations like reporting and filing.
In summary, even though many foreign investors arrive well prepared when entering the Ukrainian market, some challenges (such as the huge volume of primary documents required for taxpayers to substantiate their transactions to the Ukrainian tax authorities) can be much more significant than anticipated.
“Ukraine very much remains a document-centric country,” according to Popov.
Constructive and open dialogue with the tax authorities may also not be as straightforward in Ukraine during difficult wartime conditions, given that the state budget faces a substantial shortfall in tax revenues. However, legal mechanisms and institutions such as the Business Ombudsman Council exist to safeguard the interests of foreign investors.
While navigating these channels can take time and effort, investors who have prepared themselves in advance by engaging the right local guidance on these matters will find Ukraine’s tax landscape, and all that this entails, much easier to navigate.
