Ukraine has joined the club of three when it comes to “e-residency in the world.” According to the Ministry of Digital Transformation, foreigners can soon start applying for Ukrainian e-residency for doing business remotely in the jurisdiction of Ukraine. And you might rightfully ask “why would they want to”? But you know, it might even make sense, if some “ifs” will be answered and preconditions met.
Probably most of you have heard about Estonia — especially about e-Estonia. The small fully digital Baltic country is the homeland of self-driving buses and delivery robots, the birthplace of Skype, Bolt and several other unicorns. As well, Estonia has almost all of the services online. It takes three minutes to declare taxes and the country is in 15th place in the Heritage Foundation’s Index of Economic Freedom.
So it could really make sense that someone would like to “plug in” and use the Estonian digital platform for remotely running and expanding their business. And they do. There are already almost 65 000 Estonian e-residents that see advantages in ease of doing business and declaring taxes, getting access to PayPal and securing their intellectual property rights in European Union jurisdiction. As well, these 65,000 includes over 4,000 e-residents from Ukraine and Ukraine is among leaders in e-residents of Estonia.
And then there is Ukraine. In the 64th place of Ease of Doing Business and in 126th in the world ranking of Perception of Corruption Index. And then there is bureaucracy. Let’s be honest, lots of it. So why would someone want to apply for e-residency in Ukraine for remotely running a business in Ukraine? Well, not so fast, let’s discuss it.
Despite the bureaucracy, often inefficiency and cases of corruption, there is also one significant advantage that might have someone think again about risk versus rewards. More precisely risk versus income. In Ukraine, there are separate categories in taxation to stimulate the so-called “small entrepreneurship” where the tax rate is just 5% of total income. For historic reasons, the separate category was created to stimulate private entrepreneurs to step-by-step to come out of the shadow of the grey economy. But as it often happens, once it is there, it is hard to change and while there are discussions of increasing the tax rate, it will most likely for a long time not be comparable to the European average tax rate of a total of 50%+ on salaries.
Now imagine that you are a Pakistanian or Indian programmer. Why Indian and why programmer? Because India, Pakistan, Bangladesh, and China are significant players in the information technology outsourcing market. Why IT? Because the salaries in IT are mostly above average and entrepreneurs are often “out of the box thinking” as well as more flexible. Yes, as well in optimizing. Hence even the name – digital nomade.
So for Ukraine, there is a temptation to go after e-residents in the countries with a significant number of IT specialists and hope that the tax income will stay in Ukraine, even if it is just 5%. Then again, to put it simply, 5% out of $2,000 average salary is $100. Too much or too little? It depends on the volume of multiplying — $1,000 to $100, probably too little; $100,000 to $100s, maybe not so little anymore. For you as a programmer, of course, the 5% is less than 50:+, no math needed even.
But the precondition for this is for several “ifs” to work: If the tax system will allow significantly lower tax rates than in-home countries while legally having the advantages of paying just 5%, not the 5% to Ukraine and the rest in the country of tax residence; if there is really a simple and light mechanism to support the e-residency from remote bank account opening to avoiding unnecessary bureaucracy; if the digital signature is fully implemented and accepted by all authorities; if the business climate stays not hostile to entrepreneurs; if the support mechanism costs less that the additional income from these residents.
And then it might just as well work in the long run, as believes e-Estonia.
But as always, the main if is the most important: if we manage to step-by-step create and secure favorable business conditions for our own private entrepreneurs and stick to the rules as the sales start always start at home first. If we can convince ourselves, it is always easier to convince others.
