Foreign company’s representative office vs. LLC in Ukraine
One of the most crucial issues that a foreign company has to deal with when entering Ukrainian market is choice between LLC and representative office. It is especially confusing since there are two types of representative offices – those that can conduct business activities and those that are prohibited from such.
This topic is quite complicated and in each particular situation it would be difficult to understand all the peculiarities without help of Ukrainian lawyer. We will try to highlight the main aspects of the issue in this article.
The first and most important question is limitations of activities that a business owner will have to face upon choosing a certain type of branch office.
Thus, limited liability company can conduct a wide range of business activities as well as is the most popular form of legal entity in Ukraine. At the same time you can do business through a representative office only upon undergoing special procedure of registration by tax authorities. Representative offices are officially established to perform representative functions, support of marketing programs, etc.
Even upon receiving permission to do business from Ukrainian authorities, a representative office will face a number of difficulties which are the result of legislative gaps. For example, a representative office may face difficulties when obtaining licenses for some types of business activities (in some situations it will be even impossible to get one).
This question may require clarification. Certain business activities in Ukraine cannot be conducted without prior authorization from the government in the form of license issuance. For example these activities include sale of medicines, production of medicinal drugs, construction activities, medical practice, etc. There are about 50 types of activities that are subject to licensing. Licenses (permits) are not issued by a single authority. Each one is granted by certain ministry or other governmental authority. Also, regulations on each license issuance are different and depend on corresponding business activity. All this causes governmental authorities to issue licenses for representative offices quite unwillingly while some of them deny issuance at all, referring to legislative gaps.
The second important issue that should be considered when choosing between LLC and foreign company’s representative office is tax rate for the particular type of business. There is about dozen of taxation systems as well as many tax exemptions and restrictions in Ukraine. Representative office of a foreign company in Ukraine has significantly fewer opportunities regarding choice of more beneficial taxation programs which is mainly because it does not have status of a legal entity. Another important aspect is that unlike a limited liability company, a foreign company’s representative office is not recognized as resident of Ukraine for the purposes of taxation.
Ukrainian legislation in force allows to register LLC in Ukraine with 100% share of foreign member in its charter capital. This applies to both foreign individuals and legal entities.
It should be noted that when registering LLC in Ukraine, parent company that is registered in a foreign jurisdiction can’t be liable for activities of its enterprise in Ukraine. Its liability is limited by the amount of share in charter capital. This happens because LLC in Ukraine acts on its own behalf, assumes personal rights and responsibilities, property and debts. Based on this rule one can reach the conclusion that business formalized in the form of LLC can be easily sold or restructured by offering investor to become a cofounder.
Foreign company’s representative office lacks such features. It always acts in the name of parent company and creates rights and responsibilities for the latter. At the same time parent company assumes all the liabilities related to activities of it representative office in Ukraine. Obviously a representative office which is basically a branch office of foreign company cannot be sold by means of corporate rights disposal.
When starting business in Ukraine, a number of foreign corporations want their branch offices to be headed by a foreigner. Formalization of business in Ukraine in the form of representative office allows to achieve this without any difficulties. However, if a foreign company or individual wants to do so in situation with LLC, it will be necessary to hire a nominal manager.
In accordance with Ukrainian laws it is impossible to set up LLC without appointing its head. Employment of foreigners in Ukraine is possible only after obtainment of employment permit for each of them. Such permit obtainment procedure can be initiated exclusively by employer. Therefore, LLC that is undergoing registration cannot be headed by a foreign director.
In practice such LLC is opened with a nominal director who initiates the process of work permit obtainment for particular foreigner without performing any business activities. Upon receiving such permit the manager is substituted. Certainly this process requires some time.
And finally we would like to note that registration of foreign company’s representative office in Ukraine is more expensive and requires more time comparing to registration of limited liability company. Thus, the minimum term of LLC registration in Ukraine is 3 days while registration of rep. office takes 3 months. Registration of representative office also requires more resources and high quality legal support, therefore costing more than registration of LLC in Ukraine. Also, official fees for registration of representative office are significantly higher comparing to LLC opening fees. It is required to pay 2500 USD of official fee to the state for registration of rep. office while the official payment for LLC registration is less than 30 USD.
However, in some cases registration of representative office can turn to be cheaper and more comfortable for future activities. For example, when planning to invite a big number of foreign employees to your branch office that was formalized in the form of LLC, you will have to defray a significant amount of money in order to get work permits for all of them while it is not required to get work permits for employees of representative office.
As can be concluded from this article, choice of organizational form for entry onto Ukrainian market requires consideration of many aspects, the majority of which were covered by this publication. Attorneys of our law firm will gladly help you get better understanding of Ukrainian laws as well as advise on the most optimal form for doing business in Ukraine.
