War and economic turmoil last year didn’t leave Ukraine’s information technology industry unscathed. The sector in 2014 received $40 million, or twice less in outside investment, than the previous year.
There are still 50,000 software engineers in more than 500 outsourcing companies, more than 100 global research and development centers and e-commerce companies in the country, and more than 2,000 start-ups, according to Yevgen Sysoyev, founding and managing partner at AVentures Capital.Their combined value is $5 billion and still growing.
Not everyone is pleased with the situation though, said Andrii Buzhor, legal counsel at Global Logic in Kyiv, which makes full-cycle software products and cloud applications.
“During 2014, IT companies, especially in eastern Ukraine, were preoccupied with securing continuity of their business and organizing events demonstrating their ability to swiftly transfer business to safe regions of Ukraine or abroad in case of force majeures. These measures have proven (their) worth,” Global Logic’s Buzhor says.
The lack of good news about Ukraine doesn’t help too, said Dmytro Gadomsky, legal expert at Juscutum law firm. One positive sign would be if the president signs a bill that only lets police seize computer servers with court orders, he said.
Online retailer Rozetka.ua was crippled during a police raid in 2012 when its servers were seized.
“The state doesn’t wait for court decisions, it just beats, frisks, arrests you,” said Vladyslav Chechotkin, Rozetka’s founder and CEO after the police raid in 2012. “In the course of that standoff we won 11 court cases, but every time there was another one coming next… If the state wants something from you, you have only one option — to give it up.”
The business community initially welcomed the appointments of investment banker Aivaras Abromavicius and former Microsoft Ukraine CEO Dmytro Shymkiv into government positions.
Shymkiv became deputy head of the presidential administration and took the lead in promoting the president’s reform agenda. He caused a stir, however, when he pushed to cancel tax breaks for IT companies by raising their profit tax from 5 to the standard 18 percent.
He defended the move in an interview with AIN.ua on Jan. 19, saying that no industry deserves special treatment.
Lawyers are afraid that Shymkiv’s next move will be to launch campaign against freelancers who work for IT companies.
Gadomsky says the average salary of a tech specialist in Ukraine is $2,000, far above the average Ukrainian monthly salary of $146 or Hr 3,455 based on data provided by the State Statistic Service. Unlike company employees, freelancers register as payers of a single tax and avoid paying the 15-20 percent personal income tax rate.
Thus, most prefer to work as private entrepreneurs who provide services to company vendors, rather than employees.
The government also simplified the procedure for foreigners to obtain work permits, based on a Cabinet of Ministers’ Jan. 28 resolution to de-regulate business activities. A diploma from the most trusted university rankings now serves as proof that a person is in demand and automatically eligible to work in Ukraine.
Similarly, foreign employees in the IT industry are justified to the extent that they will be hired as managers or professionals or otherwise will be engaged in the production of copyrighted work.
One restraint is the need to obtain a license from the central bank to establish an entity abroad. This is considered a necessity for start-ups whose clientele are mostly based outside the country.
In 2014, central bank governor Valeriya Gontareva promised that this archaism would be abolished. However, she said the time isn’t right yet because it will lead to money leaving the country.
A bribe to obtain such a license can be as high as €500,000, Gadomsky says.
Also requiring simplification is the registration of e-payment systems. Experts believe the central bank has dragged its feet on this.
In 2013, the State Fiscal Service froze Hr 60 million on the Ukrainian accounts of international e-payment system WebMoney because it didn’t have a license from the central bank.
PayPal, a leading American e-payment system, has for the past four years been trying to enter the Ukrainian market, but failed due to harsh regulations, according to Natalie Nayman from Jurimex law firm. Ukrainians can purchase goods abroad using the payment system, but it is illegal for them to receive payments on their accounts.
The central bank exclusively allows the emission of currency in hryvnia, which is not issued by PayPal, Jurimex’s Nayman says. Consequently, to operate legally in Ukraine, PayPal has to obtain a license, adjust its system to issue e-money in hryvnia and get the central bank’s approval.
Nayman added that e-commerce operations can’t fully function in Ukraine under such rigorous terms.