What will e-residency give Ukraine?

What will e-residency give Ukraine?

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To put it simply, electronic residents (e-residents) are foreigners who, already in 2022, will not need to obtain Ukrainian citizenship or even appear here in order to officially become individual entrepreneurs (so far only in the field of IT) and pay taxes in Ukraine.

E-residency was invented and launched in 2014 by Estonians, giving the world access to a convenient, reliable, and well-functioning infrastructure of their e-state. Estonia was one of the first in the world to digitize, build clear and transparent state processes, and does not leave the top world rankings of economic freedom and ease of doing business. The Estonian tax system remains the most competitive in the world for the eighth year in a row. As of December 2021, more than 87 thousand e-residents from more than 170 countries of the world have already poured more than 80 million euros into the Estonian budget.

Our Ministry of Digital Industry is promoting the Ukrainian e-residency project, citing Estonian success. The forecasts for Ukraine, however, are as follows: by the end of 2022, up to three thousand e-FOPs of the III group are expected (mainly freelancers from India, Pakistan, China, Bangladesh, and the Philippines) and $ 1.5 million in budget revenues … What the expected economic effect is based on is not said.

But the ambitious PR is fully present: “Ukraine in a smartphone” is conquering the world with simple solutions for millions of Earth citizens. Only political incantations and the actual draft of amendments to the legislation, which have already passed the first reading in parliament, are not yet very consonant.

By the second reading, bill No. 5270 on the experimental tax regime for e-residents is being substantially finalized, so it is not yet possible to say with confidence what the Ukrainian e-residency will look like. The draft law, ready for the second reading, according to its author, the first deputy head of the Verkhovna Rada Committee on Finance, Tax, and Customs Policy Yaroslav Zheleznyak, is likely to be seen in January. In the meantime, we can take a closer look at the already known important details.

pros

Attractive tax: For e-residency, only the status of FOP of the III group on a single tax will be available, and 5% is a very attractive rate. They also wanted to exempt e-residents from ERUs: all that remained was to find a way to implement this without violating international agreements on social
insurance.

Will not be superfluous: If the rate works and the demand for Ukrainian e-residency becomes noticeable, this will not hurt the Ukrainian budget at all. Even though it is now completely unclear how these revenues will go to local budgets because this is where the single tax paid by individual entrepreneurs should go. All e-residents will have one “registration” – the office of the state enterprise “Diya” in Kyiv.

   Physical security: Ukraine will not be able to “break down” the doors and withdraw equipment from someone who is not physically here.
Minuses

  Unattractive tax: Ukrainian e-residency only provides electronic access to the harsh Ukrainian reality.

“E-residency in Estonia has already been built on top of the efficiently operating other infrastructure: courts, tax inspectorate,” explains a citizen of Ukraine and an Estonian e-businessman Konstantin Klyagin, whose company develops, including digital solutions for European public services. He says that during his work with Estonia, the tax authorities did not come to him with checks, but, for example, they called to clarify when he needed service in order to have time to provide it: “Such an investment nanny is just an ordinary tax officer”. The Ukrainian tax office sends employees to the place of registration with a demand to come to them without explaining the reasons: “I say: I will not come. Let you, as civilized people, write letters to me, and I will respond to them with my lawyer. Each visit to you opens a window of corruption, let’s not do that. And this happens about once a year. There is no such thing in Estonia ”.

A similar situation is with the Ukrainian jurisdiction: to settle disputes in a country where the courts are less trusted than the newspapers of the aggressor country, and corruption scandals involving the highest officials of the judiciary do not leave TV screens, is a dubious incentive.

At the same time, the business card site of the electronic residency of the Ministry of Digital Industry promises e-FOPs a friendly tax one (this is where ordinary FOPs can get offended). And literally the next line – “a personal manager from the government” for interaction with government agencies. Everything is so “friendly” that every e-resident cannot do without help.

  Fraud: A real problem even for high-tech Estonia has become the verification of potential e-residents for penalties for criminal offenses that are not included in international databases, as well as bans on doing business abroad. Because of this, scammers were able, for example, to use e-residents to liquidate problematic Estonian companies. And also to create and avoid supervision over the work of a number of enterprises in the area with a high risk of money laundering and terrorist financing.

Ukraine will also face similar challenges, but at least we have been warned. That is, we have a chance to find a systemic solution at the start, and not after the fraud with Ukrainian e-identification neutralizes all the positive PR effects.

Underwater rocks

   E-insecurity: In addition to the already well-known claims of information security specialists to the entire Diya ecosystem, e-residency can lay additional risks for personal data and confidential information of those who use it. The Main Scientific and Expert Directorate of the Verkhovna Rada drew attention to these risks in its conclusion on draft law No. 5270 for the first reading.

Among them – the endowment of the state-owned enterprise “Diya”, the administrator of the portal “Diya”, with many powers in the tax area, although it is not a subject of tax legal relations. For example, the bill stipulates that “the regulatory authorities have the right to apply with a written request to the administrator for the provision, in the manner specified by this subsection, of information on the volume and movement of funds on the accounts of e-resident entrepreneurs and other information and/or documents related to calculating and paying taxes, fees, payments and/or paying off the tax debt of such e-resident entrepreneurs. ” With this approach, the administrator gains access to tax and banking information. Even without the obligation not to disclose information, which is essentially confidential.

  Losses for the state: The main scientific and expert department of the Parliament draws attention to the fact that the draft law does not have a proper financial and economic justification with appropriate calculations, and emphasizes two risks. First: only income received from residents of Ukraine will be recognized as income of a non-resident received from Ukraine (in the respective countries). Second: additional competition is created and the corresponding risks in terms of employment for citizens of Ukraine. All this, according to parliamentary experts, may affect the attractiveness of the proposed taxation regime for foreigners and not lead to an increase in tax revenues. And taking into account the reduced tax rate proposed in the project, it should only be used to minimize tax payments. With this approach, the institution of e-residency may simply turn out to be unprofitable.

By the way, according to the data of the Estonian state control, revenues from the e-residency program in Estonia began to exceed expenses by the end of the first five years of work.

Now it’s up to the parliament. It will be possible to judge how attractive the e-residency project will be for e-residents and profitable for Ukraine after the draft law is finalized and adopted. For now, we hope that by the second reading it will at least be cleared of mines.

Only one thing can be predicted with certainty: PR will be more than an economic effect. The intrigue of the experiment lies only in how much.

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