Accounting for payroll of employees of a foreign mission in Ukraine

Employees are an integral part of the business and its expenses. Representative offices of foreign companies are no exception. There is no difference between permanent or non-commercial representative offices, they will still have employees, who should receive their salaries.

The problem most often arises from the fact that a foreign company that sets up a representative office in Ukraine has a very vague idea of the payroll accounting in Ukraine, and the pitfalls of this process.

In such a situation, the easiest option would be to find an experienced accounting outsource company that would keep the company’s documentation in the required amount, at least at the start of business.

You may also like: Representative Office Employment Issues

How to properly organize the payroll accounting of the representative office?

For taxation purposes, representative offices of non-residents with income received on the territory of Ukraine are tax agents. Their duty includes the calculation, payment and submission of tax returns from wages and salaries.

If employees are residents of Ukraine, payroll taxes will be accrued according to the law of Ukraine. 

The main taxes withheld from wages and salaries are personal income tax (PIT) and military fee. The personal income tax rate is 18% and the military fee is paid at 1.5% - these taxes are deducted from wages.

However, the unified social contribution (USC) at 22% is charged on wages and paid by the employer.

Taxes are calculated on the salary established in the staff schedule of the enterprise and additional payments in the form of bonuses and other social payments.

For example: if the salary is UAH 6,000,  personal income tax is paid at 18% and military fee - at 1.5%. Thus, an employee gets UAH 4,830. And the unified social contribution at 22% - UAH 1,320 is paid by the employer, and included in the company’s expenses.

Please note! Ukraine has a minimum wage for a full working month. As of 2020, the rate is set at UAH 4,723 per month. This amount is approved by law and does not depend on the qualification of the employee.

In case of part-time work (less than 40 hours per week) it should be taken into account that the amount of the unified social contribution  cannot be calculated from less than the minimum wage.

Taxes on non-resident wages must take into account the status of a natural person employee - this will determine the calculation of the unified social contribution on wages. For example: 

• If the foreign employee has a residence permit or other documents confirming his/her permanent stay on the territory of Ukraine - the unified social contribution is accrued on the general terms. 
• Non-residents are not subject to the Labour Code of Ukraine and no unified social contribution shall be accrued on their wages.

Taxes deducted from wages - personal income tax and military fee - are calculated in the general order from the income received on the territory of Ukraine

Read also: Accounting Support Of A Business Entering The Market Of Ukraine

Peculiarities of payroll accounting of foreign representative offices

In addition to employment relations, there are civil law contracts (CLC), which are concluded for one-time work. Their taxation is the same as for wages. The difference lies only in the preparation of reports. CLCs are most often used for a one-time job or, for example, to close a project in order not to hire an employee. It is especially relevant in IT-spheres.

There are many situations in which the tax rates may not apply, or apply, but in other amounts. For example, there is non-taxable material assistance. Its maximum amount is set by the TCU and as of 2020, it amounts to UAH 2,940, or a separate rate of the unified social contribution is set at 8.41% when calculating the salary of an employee with disabilities. In addition, there are bonuses, holidays, sick leave, which shall be also properly calculated. All these questions can be answered by an experienced accountant.

In the near future, there will be a lot of changes in labor legislation and tax rates. For example, there is already a draft law which considers not taking into account the minimum amount of the unified social contribution if the employee pays the tax as an individual entrepreneur. It is important to keep an eye on any changes in the laws of Ukraine in order to avoid penalties imposed by regulatory authorities.

If you want to organize the payroll accounting of your company’s representative office in Ukraine in compliance with all the rules and without problems, don’t hesitate to call us.