ILF provides legal assistance to an American IT company opening its R&D office in Ukraine

It is no secret that Ukrainian programmers are in high demand all around the world. Many Western businesses outsource software development to companies located in Ukraine, while others find it more convenient to open their own R&D offices here.

An American IT company specializing in climate control solutions for Smart House systems decided to open an R&D department in Kharkiv. The project’s legal aspects were overseen by a team of ILF lawyers led by associate partner Anton Zinchuk.

ILF lawyers supported the opening of the Ukraine-based subsidiary, helped conclude an office lease contract and purchase equipment, as well as shaped contracts required for the department’s work. In the course of the project, we also advised the client on available legal models for organizing the work of an R&D office in Ukraine, hiring of employees, and formalizing labor relations with independent contractors.

A foreign company that wishes to open an R&D office in Ukraine should take into account two things: hiring and protection of intellectual property rights.

  1. Hiring. Most IT companies hire people as FLPs (sole proprietors), i.e. independent contractors. With this method, the amount of tax and other such expenses for the company does not exceed 6%. For comparison, the total tax burden on the employer when registering personnel as employees under an employment contract is about 42% of the salary. Foreign companies seeking to enter the Ukrainian market should understand this cost structure to be able to assess the effectiveness of their Ukraine-based office.

When advising the American company, we considered both options – conventional employees as well as contractors, leaving it to the client to choose the best option.

Of course, FLPs are undoubtedly cheaper than full employees. However, the state frowns upon such working relations, especially when FLPs are actual employees. Moreover, there exists liability for so-called hidden labor relations – 30 minimum salaries, which is now about 112 thousand UAH ($4,300) for 1 actual employee.

Thus, if you try to conceal actual labor relations, the authorized state body (i.e. labor inspection) might discover it and impose a fine on you. Therefore, it is important to ensure that contracts are done properly and contain an explanation as to what all those people are doing in your office.

2. Intellectual property. Intellectual property law in the U.S. contains an interesting concept, it's called Work for Hire. If a company enters into a contract with an employee or contractor, then everything they create through intellectual labor belongs to the company. Naturally, American companies want their contracts with software developers and designers in Ukraine to be the same way.

However, Ukrainian legislation works a bit differently: it has a clear logic on how intellectual property rights for, say, program code arise. Our law states that intellectual property rights belong to the creator. If the client wishes to be the owner, then the rights must first be transferred to said client. There needs to be a legal document that confirms this transfer. Furthermore, the copyright law requires the transferred rights to be clearly defined, indicating exactly what rights are transferred. Without this, the transfer is not considered valid. Therefore, when Work for Hire contracts state that all rights are transferred, it actually means that none of them are. Intellectual property rights must be described in detail in a document on the transfer of intellectual property rights or another similar document, indicating the property and the rights being transferred.