Outsourcing and Tech in Ukraine: Legal Insights for Foreign Service Providers

Andriy Lytvyn, Attorney at Law, Head of Kharkiv Office

Oleksandr Fefelov, Attorney at Law, Partner, Head of Antitrust and Competition Practice

Source: Chambers

Ukraine has long been one of the leading IT outsourcing centers in Europe. A strong technological community, high level of education and professionalism of engineers combined with competitive prices for services make Ukraine attractive to international clients. Even under extraordinary war conditions, Ukrainians have already demonstrated stability and high ability to provide high-quality outsourcing services, which confirms their reliability as partners in the field of IT and technology.

Advantages of IT Outsourcing in Ukraine

A key factor in the attractiveness of Ukraine is its legal environment:

• Common values ​​and approaches with European and American clients regarding the protection of intellectual property;
• Effective mechanisms for the protection of intellectual property rights;
• Compliance with international standards in the field of data protection and favorable state policy.

For foreign companies, legal aspects are critically important, since contractual and legal mechanisms determine the ownership of software products and intellectual property, ensure data protection and guarantee compliance with the terms of the contract. This significantly reduces contractual risks for clients.

Properly structuring cooperation minimizes potential disputes and financial risks, thereby creating a stable foundation for long-term international projects. Ukraine has long been one of the leading IT outsourcing hubs in Europe. A strong technological community, a high level of education, and the professionalism of engineers, combined with competitive service costs, make Ukraine attractive to international clients. Even under the extraordinary conditions of war, Ukrainians have already demonstrated stability and a high ability to deliver high-quality outsourcing services, which confirms their reliability as partners in IT and technology.

Legal Regulation of IT Outsourcing in Ukraine

Legal regulation in the IT industry in Ukraine is based on a combination of civil and commercial law provisions, subordinate legislation in intellectual property, personal data protection, information security, as well as specialized regulatory acts aimed at supporting the digital economy. The choice of a cooperation model significantly influences upon the scope of legal requirements that a foreign company will face.

We can distinguish several outsourcing models:

• Direct contracts with contractors or IT companies in Ukraine. This is the simplest model, which involves only entering into a service contract. In this case, the main issues will be: legally correct drafting of contract terms; determination of jurisdiction and applicable law; regulation of transfer and protection of intellectual property rights; and ensuring confidentiality and data security.

The advantage of this model is the speed of collaboration launch and minimal organizational commitment. The disadvantage is higher long-term costs, limited control over the process, and dependence on an external provider.

• Incorporation of the company in Ukraine.This option is more complex to implement but provides strategic benefits. The parent company gains the ability to directly hire specialists and build internal processes in line with its own business goals and policies. At the same time, one must take into account the full scope of national legal regulation, in particular: procedures for registration and corporate governance of legal entities; taxation issues (including the possibility of applying special regimes such as Diia.City); labor relations and alternative cooperation models (gig-contracts, civil-law contracts, cooperation with individual entrepreneurs); regulation in the field of intellectual property; legislation on personal data protection and cybersecurity.

Thus, although entering into direct contracts with existing Ukrainian IT companies is a less bureaucratic way to organize cooperation, in the long run it loses out to creating its own business unit. Creating a legal entity in Ukraine allows for significant tax and organizational advantages, as well as greater control over intellectual property protection, information security, and personnel management. It is also important that some IT-related companies have the right to reserve employees (i.e., male employees in certain circumstances are not mobilized to the Armed Forces of Ukraine), which allows them to maintain a stable workforce and offer attractive working conditions in conditions of a certain shortage of personnel.

Despite the complexity of the legal field, typical for the countries with civil law legal systems, the second option – creating their own subsidiary in Ukraine – is often more profitable for foreign companies that seek to be serious players in the IT sphere.

Tax Structuring of IT Companies in Ukraine

IT companies in Ukraine, despite their specifics, operate within the general legal framework mandatory for any business. At the same time, unlike many other sectors of the economy, the IT sector enjoys additional preferences that significantly expand opportunities for business organizations.

The state has consistently shaped a policy of a favorable legal environment that stimulates the development of the digital economy and the attraction of foreign clients. The most notable example is the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” and the special legal regime Diia.City, which created new legal mechanisms for structuring business, attracting specialists and protecting intellectual property rights.

Taxation of a Legal Entity

The most common organizational and legal form of doing business for foreign investors is a limited liability company (LLC). For such an LLC, the general taxation system applies, regardless of the type of activity, income, or number of employees: corporate income tax – 18% of profit (income minus expenses); value-added tax (VAT) – 20%. In addition, taxes and fees on employee compensation under employment contracts must be paid.

Cooperation with Individual Entrepreneurs (FOP)

Among the “traditional” models of tax optimization IT companies is using cooperation through the system of individual entrepreneurs (FOPs), which for many years has been the main mechanism for arranging for the work of IT companies and remains relevant so far.

This model allowed for simplified taxation with significantly reduced rates and minimal administrative burden. For example, currently, a FOP on the third taxation group must pay 5% unified tax, 1% military levy, and a minimal unified social contribution (USC). Thanks to this model, Ukrainian IT services remained competitive on the global market for a long time, even though regulatory authorities often qualified such interaction between FOPs and IT companies as labor relations and imposed additional financial obligations.

Employment Contracts

At the same time, the “unpopular” but fully legal and “transparent” mechanism has always been the employment contracts. However, for businesses, this model is more expensive, since it requires payment of 18% personal income tax, 5% military levy, and 22% USC from the employee’s income.

It should also be noted that hiring specialists under employment contracts gained more popularity during the war, due to the possibility of reserving such employees from mobilization, provided other necessary criteria for the company’s critical importance to Ukraine’s economy are met.

Diia.City – Special Legal Regime for IT Companies

A real compromise between the interests of the state and business became the special legal regime Diia.City. Initially, the IT community cautiously received this innovation, but later, most companies recognized it as effective and beneficial, concluding that Diia.City was designed to create a modern and understandable regulatory environment for IT.

The key advantages of Diia.City residency are:

• Preferential taxation: 9% exit capital tax or 18% corporate income tax;
• Flexible forms of engaging specialists: employment contracts or gig contracts; for employees under employment contracts: 5% PIT, 5% military levy, 22% USC from minimum wage; for gig specialists: 5% PIT, 5% military levy, 22% USC from minimum wage;
• Transparent corporate structure understandable to foreign investors;
• Additional legal mechanisms for protecting intellectual property rights and attracting investments.

In Ukraine, various models of organizing the tax structure of IT business are available – from traditional FOP contracts to Diia.City residency – each with its own advantages and disadvantages. This allows international clients to build cooperation in forms that meet Western jurisdiction standards, while maintaining competitiveness thanks to optimized tax burdens.

Types of Contracts When Working With IT Specialists in Ukraine

When working with an IT company in Ukraine, the set of contracts is usually quite standard for the industry.

Software Development Agreement (SDA)

A Software Development Agreement (SDA) is a classic instrument in IT. It can be concluded with a company, an FOP, or individuals without special status. Depending on arrangements, it may have features of a contract for work or a service agreement.

Such a contract usually contains a technical task, definition of work stages, acceptance procedure, payment terms, liability of the parties, and procedure for transferring intellectual property rights. It is important to clearly define the moment of transfer of rights to the developed intellectual property object in order to avoid disputes regarding ownership of source code.

Foreign clients are often interested in the specifics of intellectual property rights transfer in Ukraine. Ukrainian law ensures a transparent mechanism for transferring such rights to foreign clients. Their transfer does not require additional registration procedures – properly drafted contractual provisions are sufficient.

Software Transfer Agreement (STA)

A software transfer agreement ensures the full and unconditional transfer of proprietary intellectual property rights. This agreement specifies the exact moment of transfer and details the scope of rights (use, modification, distribution, etc.), as well as other provisions.

Although it may be concluded as part of a software development agreement, it is still advisable to execute it as a separate document. Such structuring simplifies proving ownership rights before third parties and limits the information they receive about the intellectual property object. Separate execution makes the legal framework more transparent, reducing the risk of conflicts.

Non-Compete Agreement (NCA)

The purpose of an NCA is to restrict the use of acquired experience and knowledge by a developer or other person involved in a project in competing projects. It defines the scope of activity, duration, and territory of restriction.

In Ukraine, NCA practice is complex, since such restrictions may conflict with the constitutional right to work. Therefore, for their validity, it is important to include:

• Compensation to the specialist for the restriction period;
• Clear wording of obligations and penalty provisions.

Non-Disclosure Agreement (NDA)

An NDA is a tool for protecting commercial and technical information. It defines what is considered confidential information, sets non-disclosure periods, regulates the use of obtained data, and establishes liability for violations. It is advisable to sign an NDA even at the stage of preliminary negotiations, before sharing ideas or technical solutions.

Gig Contract

A gig contract is a special instrument provided by the Law of Ukraine “On Stimulating the Development of the Digital Economy” within the Diia.City regime. A gig contract combines elements of labor and civil-law relations but is neither an employment contract nor entrepreneurial activity.

Under a gig contract, the developer (gig specialist) performs tasks for the client – a Diia.City resident – receives payment, and may benefit from additional guarantees (insurance, compensation, etc.). The IT company-resident acts as the tax agent, so the specialist is exempt from filing tax reports by himself.

The contract may regulate a wide range of issues: work schedule, company policies, personal data processing, social guarantees. Importantly, all proprietary rights to products created under a gig contract belong to the company unless explicitly stated otherwise. Therefore, legal precision in drafting is essential.

Data Processing Agreement (DPA)

A DPA regulates the procedure of processing personal data. Certain nuances may arise due to the incomplete alignment of Ukrainian personal data protection legislation with the GDPR, but this is only temporary. In any case, Ukrainian IT companies working with European clients must comply with GDPR. Hence, the need to conclude a DPA and use EU Standard Contractual Clauses arises.

Key tasks resolved by the above contracts:

• Clear regulation of intellectual property rights transfer to developed software;
• Protection of confidential information, personal data, and their processing procedure;
• Allocation of liability and risks for breach of obligations;
• Determination of dispute resolution mechanisms – common practice is to include arbitration clauses with the choice of international institutions, although disputes in national courts, including Ukrainian ones, are increasingly used.

Types of Disputes in the IT Sector

The most typical disputes logically follow from the types of contracts used in IT cooperation, with some exceptions. The usual categories of court cases involving IT companies include:

Intellectual property disputes:

• Regarding authorship and ownership of rights to source code, design, databases, or algorithms;
• Regarding the moment and scope of rights transfer under agreements;
• Regarding use of trademarks or domain names.

Non-compete disputes:

• Recovery of penalties or damages for NCA violations;
• Validity of NCAs.

Confidentiality and trade secret disputes:

• Unlawful disclosure or use of technical solutions, client databases, business models.

Compensation and payment disputes with IT specialists:

• Amount and timing of payment;
• Dismissal challenges and classification of relations as labor.

Disputes with regulatory authorities:

• Tax: reclassification of civil relations into labor, additional tax assessments and fines;
• Labor: inspections by the State Labor Service regarding employee registration and compliance with labor guarantees.

Sanctions disputes:

• Blocking payments or contracts due to non-compliance with sanctions regimes;
• Disputes regarding software potentially subject to export control.

Dispute Resolution Mechanisms in the IT Sector

In Ukraine, IT disputes are resolved through negotiations, international arbitration and national courts.

International Arbitration

This mechanism is typical only for limited cases of the cross-border contracts with significant dispute amounts. Large international companies often prefer arbitration as it seems more familiar both mentally and normatively. The advantage is obtaining a decision from a dispute resolution body that establishes facts and rules on the merits.

However, when providing for such dispute resolution in a contract, one must predict at least one step ahead and ask: is it possible to enforce the arbitration award in Ukraine immediately and without recognition procedures in Ukraine? The answer is no. If arbitration is conducted against a Ukrainian company, an interested person still has to apply to a Ukrainian court to seek recognition and enforcement.

National Courts

Ukrainian courts are an effective mechanism for resolving IT disputes when the parties are  not able to agree. Such proceedings require building a procedural strategy, pre-trial preparation of evidence, conducting expert examinations, and, of course, time. Obviously, the better the preparation before filing a claim, the higher the chances of success. Courts do not always have consistent practice in high-tech disputes, especially regarding source codes, so pre-trial preparation is very important. At the same time, one can at least predict the timelines and procedural aspects, which are relatively clear.

Mediation in the IT Sector

Negotiations are a common method of dispute resolution, being the fastest and most cost-effective for all parties. Regardless of whether the case has already been filed in court or not, whether the counterparty is a tax authority or an employee, lawful and voluntary settlement by the parties is always possible.

Case Snapshot

As an example, here is information about a recent case where Ilyashev & Partners Law Firm successfully protected the interests of a European IT company in a dispute over copyright infringement of a computer program by a Ukrainian company.

The disputed computer program was developed with the participation of the European IT company. However, the Ukrainian company failed to duly formalize the transfer of intellectual property rights, yet managed to obtain a state certificate of copyright registration. Subsequently, the Ukrainian IT company assigned the copyright to a U.S. company, which was unaware that the European software development company – the client of Ilyashev & Partners Law Firm – had co-authored the program. This led to a lawsuit in the United States against the firm’s client.

Ilyashev & Partners Law Firm conducted a thorough analysis of the case and developed an effective defence strategy. After complex negotiations, the parties reached a settlement: the European company received a substantial monetary compensation, and all pending claims were withdrawn following mutual waivers.

Recommendations for IT Companies Operating in Ukraine

Ukraine remains an extremely attractive jurisdiction for IT outsourcing due to the high level of specialists, competitive costs, and the development of modern legal mechanisms (in particular, the Diia.City regime). At the same time, successful cooperation requires consideration of a number of legal nuances.

Before starting work in Ukraine, foreign companies should:

• Determine project timelines and, depending on this, choose the appropriate outsourcing model;
• Clearly regulate in contracts the transfer of intellectual property rights, confidentiality, party liability, and dispute resolution mechanisms;
• Ensure compliance of the counterparty’s operations with GDPR and other international data protection standards;
• Pay attention to sanctions-related provisions.

Engaging local legal advisors allows for significantly reducing regulatory and contractual risks and adapting contracts to Ukrainian realities. Properly structured outsourcing in Ukraine combines high-quality service, a transparent tax model, and a reliable legal framework for international clients.