The relocation of Ukrainian businesses abroad, which in 2022 took the form of emergency evacuation, is becoming strategic planning to diversify risks, enter EU markets, and ensure business continuity, according to Kateryna Danilova, partner at Barristers Law Firm.
“While in 2022 relocation was often an emergency evacuation, it is now taking on the characteristics of strategic planning with the aim of diversifying risks, entering EU markets, and ensuring business continuity,” she told the Interfax-Ukraine news agency.
Danilova noted that “since the start of the full-scale invasion, Ukrainian businesses have kept up their interest in relocation, although it’s changed depending on what’s happening on the front lines and the overall economic situation.”
According to the lawyer’s observations, the information technology (IT) sector is the most active in terms of relocation, due to its mobility, focus on global markets, and minimal dependence on physical assets.
“For IT companies, relocation often means opening offices in EU countries to retain their teams, which also allows them to guarantee continuity and stability of services to their clients and simplifies access to international financial infrastructure. Many companies based in Diia.City are setting up overseas hubs while keeping a significant part of their development in Ukraine,” she said.
In addition, according to Danilova, manufacturing companies in light industry, woodworking, component manufacturing, and the food industry are also very active in relocation.
“The main driver for them is the desire to protect production facilities from physical destruction, bring production closer to European consumers, expand the sales market, etc.,” she said.
Agrarian and processing enterprises are also active in relocation, seeking opportunities to create processing capacities in neighboring EU countries to gain access to the market without logistical complications at the border.
In addition, these are companies in the creative industry, consulting, and marketing, which, like IT, are mobile and actively integrating into the European market.
Commenting on the geography of relocation, Danilova noted that the choice of a relocation country depends on many factors, including geographical proximity, logistics, business conditions, the availability of support programs, the tax climate, and cultural and linguistic similarities.
Currently, the main destinations for Ukrainian businesses are Poland, which leads in the number of relocated Ukrainian companies, and Germany, where Ukrainian businesses are attracted by economic stability, access to the largest EU market, and high purchasing power, although this country is “characterized by a higher level of bureaucracy and tax burden.”
In addition, Ukrainian businesses are relocating to Romania and Bulgaria, which are gaining popularity thanks to, in particular, competitive tax rates and lower labor costs, the Czech Republic and Slovakia, which are traditionally attractive due to their cultural proximity and favorable conditions for small and medium-sized enterprises, and the Baltic countries (Lithuania, Latvia, Estonia), which are “interesting for technology and innovation companies due to their developed digital infrastructure and favorable investment climate.”
However, Danilova stressed that “it is legally impossible to transfer an employee from a Ukrainian legal entity to a foreign one, as they are different business entities operating in different legal systems,” but in practice, companies use a number of mechanisms.
These include, in particular, dismissal in Ukraine and employment abroad, which is the most common and transparent mechanism, but requires the employee to obtain a residence and work permit in the country of relocation, or a business trip, which is risky for long-term work abroad.
In addition, companies use mechanisms for concluding civil law contracts, where an employee registers as an individual entrepreneur in Ukraine (or as an individual entrepreneur in the country of relocation) and concludes a service contract with a foreign company. This model is flexible but carries the risk of additional taxes and penalties.
Another common mechanism is intra-corporate transfer (Intra-Corporate Transferee), which is used in EU countries that have implemented the relevant EU Directive, which creates simplified conditions for the temporary transfer of key managers, specialists, and trainees within a group of companies. This requires, in particular, the existence of legally related Ukrainian and foreign companies. Another popular mechanism is outsourcing or “leasing” of employees, which involves removing employees from the payroll on condition that they are hired by a foreign company. However, Ukrainian legislation does not contain clear regulatory provisions governing such legal relations.
Commenting on the pitfalls of Ukrainian legislation in the field of relocation, Danilova noted a number of restrictions in the Ukrainian legal field, in particular, currency restrictions, rules for controlled foreign companies (CFC), transfer pricing (TP), as well as restrictions on travel abroad and the movement of assets.
In addition, banking compliance and opening a bank account for a new company in the EU founded by Ukrainian citizens, the complexity of managing a dual structure, the loss of preferential treatment upon the actual transfer of activities abroad, in particular IT companies, which may lose the advantages of the special legal and tax regime of Dnipro.City, as well as adaptation to foreign legislation.
“Relocating a business abroad is an effective tool for minimizing the risks of war, but at the same time it is a complex legal and organizational project. The success of relocation directly depends on comprehensive strategic planning that takes into account all legal, tax, financial, and operational aspects,” she said.
Barristers, BUSINESS, Danilova, ENTERPRISES, LAWYER, RELOCATION
Ukrainian enterprises in January-April 2024 increased imports of zinc and zinc products – by 59.9%, up to $17.217 mln (in April – $5.357 mln). Exports of zinc for four months of this year amounted to $73 thousand (in April – $29 thousand), while in January-April 2023 it amounted to $48 thousand.
Zinc exports abroad in 2023 amounted to $130 thou. against $1.331 mln in 2022. Zinc exports for 2022 totaled $1.331 million, compared to $550 thousand in 2021. Exports of tin and tin products totaled $424 thousand in 2022, compared to $346 thousand in the previous year.
Zinc is used to protect steel from corrosion, in the production of zinc whitewash, in the metallurgical industry in the production of zinc sheets, and in the manufacture of foundry lead and copper-zinc alloys. It is also used as a material for the negative electrode in chemical current sources.
Ukrainian enterprises in January-April 2024, according to customs statistics, increased imports of nickel and products by 60.1% compared to the same period of 2023 – up to $8.484 million (in April – $787 thousand million).
Ukraine in 2023 reduced imports of nickel and nickel products by 74.2% y-o-y in 2022 – to $15.391 mln. Ukraine in 2022 reduced imports of nickel and nickel products by 49.9% y-o-y in 2021 – to $59.754 mln.
The main area of nickel application is metallurgy. It is used in the production of high-alloy stainless steels. By adding nickel to the iron melt, metallurgists obtain strong and ductile alloys that are highly resistant to corrosion and high temperatures.
Ukrainian metallurgical enterprises according to the results of work in January-February of the current year increased production of total rolled products, according to operational data, by 52.5% compared to the same period last year – up to 900 thousand tons from 590 thousand tons.
According to the information of Ukrmetallurgprom association on Friday, during this period steelmaking increased by 52% against January-February-2023 – up to 1.076 million tons from 708 thousand tons.
Iron smelting increased by 42.5% to 1.050 million tons from 737,000 tons.
As reported, in January-2024 increased output of total rolled products by 75.9% y-o-y to 453,000 tons from 257,000 tons, steel by 91.6% to 544,000 tons from 284,000 tons, pig iron by 44.5% to 555,000 tons from 384,000 tons.
Ukraine in 2023 increased production of total rolled products by 0.4% compared to 2022 – to 5.372 million tons, but decreased steel production by 0.6% – to 6.228 million tons, pig iron by 6.1% – to 6.003 million tons.
Ukraine in 2022 reduced production of total rolled products by 72% compared to 2021 – to 5.350 million tons, steel by 70.7% – to 6.263 million tons, pig iron by 69.8% – to 6.391 million tons.
For 2021, 21.165 million tons of pig iron (103.6% to 2020), 21.366 million tons of steel (103.6%), 19.079 million tons of rolled products (103.5%) were produced.
At a meeting on Tuesday, the Government of Ukraine decided to transfer more than 800 enterprises with assets worth UAH 45 billion to the State Property Fund, First Deputy Economy Minister Denis Kudin said.
“This is the largest transfer of enterprises in the term of this government. In fact, now only assets in the field of energy, infrastructure, defense industry, culture and standardization and metrology remain subordinate to the ministries,” he wrote on Facebook.
According to available information, in this list, in particular, “Artyomsol”, “Konyarstvo of Ukraine”, NSC “Olympic”, “Odessa Film Studio”, coal enterprises.
Kudin clarified that so far the Fund has not been transferred to enterprises in respect of which restructuring or transformation to another organizational form is underway: for example, from a state enterprise to a state institution or state organization, or companies in a state of liquidation, or perform service functions.
“The next step is for the State Property Fund. We expect that by mid-November the Fund will be able to actually start working as a management body for these and other enterprises, regarding which the decision to transfer was made earlier,” said the first deputy head of the Ministry of Economy, who was previously responsible for managing state assets in the Fund .
Kudin recalled that the goal of the reform is to reduce the size of the state in the economy and stimulate private entrepreneurial initiative. According to him, the Fund will make a decision on privatization of some enterprises, while others will be consolidated into asset management holdings and will bring dividends to the budget.
The State Property Fund (SPF) of Ukraine would like to become a single manager of all state property in the country, while it is currently distributed among 96 different state departments, Rustem Umerov, appointed this week as its head, said.
Speaking at the Rebuilding Ukraine forum organized by UkraineInvest on Thursday, he expressed the opinion that such centralization would improve the efficiency of state property management.
The new head of the SPF, Rustem Umerov, appointed by the Rada in early September, previously announced plans to create a Sovereign Fund, which would unite the main state enterprises, as well as the intention to make the SPF the sole manager of all state property in the country, while currently it is distributed between 96 different government departments.
As of July 15, the number of enterprises relocated to safe regions under the relocation program reached 678, while at the end of May there were 601, the Ministry of Economy reported on Saturday.
“Of these, 68% (467 enterprises) have already resumed their work,” the ministry said, which is also 77 more than at the end of May.
According to the Ministry of Economy, a total of 1,732 companies have applied through the digital engagement platform to help with relocation.
Among the enterprises that have already resumed their activities in a new location, the largest share is made up of enterprises in wholesale and retail trade, repair of vehicles and motorcycles (38.7%), processing industry (33.1%), information and telecommunications (5.9%), professional, scientific and technical activities (5.3%).
Most companies have moved their facilities to Lviv (24.6% of relocated enterprises), Zakarpattia (16.1%) and Chernivtsi (11.4%) regions, the agency said.
As reported, the program to move Ukrainian production from the zone of active hostilities started in mid-March. According to the head of the parliamentary committee on finance, tax and customs policy of Ukraine, Danila Getmantsev, as of March 27, 1,120 applications were received under the evacuation program, of which 368 were transferred for transportation. By this date, the number of displaced enterprises under the evacuation program has reached 89, of which 47 have already resumed work in a new location.
The Ministry of Economy then updated the data as of April 5: the number of applications for relocation increased to 1424, relocated enterprises – up to 178, resumed work – up to 67.
According to the Ministry of Economy on May 12, the number of relocated enterprises increased to 510, resumed work – up to 303, so the topic of relocation and filing applications for it has slowed down recently.
