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E-residency: How would it work in Ukraine?

Author : Ksenia Tsivirko

Ministry of Digital Transformation has put forward the idea of ​​creating an e-residency program that will allow foreign entrepreneurs to remotely establish and run their business in Ukraine.
20:37, 18 November 2019

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The main advantages for electronic residents would be low taxes (5% of business capital for an individual entrepreneur and 18% of net profit for legal entities) and the absence of paperwork. In their try to introduce the new system, officials are guided by the similar experience of Estonia. And in the spring of 2020 they plan to launch a pilot project, which will bring the first revenues to the state treasury.

Almost every day, in a yellow three-story building on Pushkinska Street, Ukrainians become happy owners of Estonian e-resident status: here, at the embassy, ​​they receive a special ID-card and leave their fingerprints. Since then, they are able to conduct business with European partners in a more accessible way, use international payment systems and sign contracts with foreign counterparties without leaving their home couch: only Internet access is needed. But, in addition to a fully digitized bureaucracy, entrepreneurs will have another bonus: there is a 20% tax on withdrawn capital in Estonia.

In other words, while the profit is not distributed among the co-founders of the company or if it was reinvested in business development, the legal entity is exempt from paying taxes. For almost 5 years of the program’s existence, these “bonuses” have attracted more than 62 thousand e-residents and 25 million euros of direct income to the state budget of a small country. At the same time, Estonia spent about 10 million euros on the development, implementation and support of this program. It is interesting that most of the companies that received e-residency came from Ukraine: according to the latest data, 862 legal entities received this status in Estonia. The second on the list are German companies (there are 808 of them), which are attracted by a soft tax system in relation to business.

Azerbaijan was also interested in the idea of ​​opening virtual borders for entrepreneurs from all over the world: in 2018, they launched an e-residency, which differs from the Estonian prototype - you can manage a business process using a mobile phone. Now Azerbaijan calls itself the Digital Trade Hub, although its website does not contain enough information about the conditions for obtaining e-residency and is not functioning properly.

The Ukrainian Ministry of Digital Transformation also wanted to implement a similar program: for now, the idea is at the stage of developing legislative amendments, but in the spring they plan to launch a pilot version.

Digital history

E-residency in Estonia has emerged in its natural course, becoming an additional source of income to the treasury. The country already has functioning system of electronic interaction between state bodies, private companies and citizens of X-Road. The country began the digital transformation at the dawn of its independence: in a small state with a population of just over a million, there were no funds for maintaining the bureaucratic apparatus of officials. Once (in May 1997), the Estonian government discovered that by the end of the year $ 130 000 was spent for the purchase of paper and maintenance of office equipment. So the Cabinet of Ministers unanimously decided that it would be better to spend this money wisely, directing them to develop software for the e-government introduction.

In 2000, Estonia introduced the e-Tax system for online tax reporting and the m-Parking mobile payment system for parking. In 2002 free wi-fi appeared throughout the country, and in 2007, Estonians were the first to vote online for their candidate in presidential elections. But the “heart” of the digital state is the centralized X-Road data exchange system, which was developed in 2001 by local developers. In 2016, the "source" of the central components of the system received a license from the Massachusetts Institute of Technology, distinguishing itself by the fact that in the entire history of its existence the system has never been hacked. Identification of X-Road citizens is carried out by an ID card, which is issued from birth and is protected by asymmetric data encryption. An electronic chip with a part of the encrypted key is a part of the card, and the second part of the key is on the certification server and should be compared with the first when it connects to the system databases. New electronic residents of Estonia also receive the same card. An application for such a status can be issued on the website in less than 20 minutes and, after payment of the state duty, it is sent for consideration to law enforcement agencies and the border service. In 97% of cases, they make a positive decision, and within two months from the date of application at the embassy you can get an ID-card. An e-resident gets access to all the services while not being a tax resident, without obtaining citizenship and a residence permit.

Now X-Road is introduced in Finland, Azerbaijan, Kyrgyzstan, the Faroe Islands, Iceland, Japan and other countries. Ukraine is also interested in it: in October 2017, the Academy of Electronic Governance and AS Cybernetica gave the State Agency for Electronic Governance all documentation and the right to use the interoperability system, which is based on X-Road.

In Ukraine it was called Trembita, and, unlike the Estonian prototype, this system is completely decentralized, which increases its fault tolerance, data safety and security. In May of this year, government agencies gradually began to integrate into the Trembita system, and now 30 registries are already connected to it. However, long and hard work remains to be done: as the Minister of Digital Transformation stated, there are about 350 registries in total, and not all of them are fully known. The plans of the relevant ministry until 2024 include transferring all public services to online mode, which Ukrainians will be able to use with the help of the already developed Diya web service.

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If in Estonia the e-residency program is completely based on the e-government system that has been tested over the years, then in Ukraine these processes are planned to be launched in parallel. “In fact, the appearance of Trembita on the basis of the Estonian X-Road system has nothing to do with our plans to introduce an electronic residency program in Ukraine. I came to this idea for other reasons: when I opened a company in the USA 10 years ago, I didn’t have to contact the tax service directly at all. I conducted all operations online. But in our understanding of the word there are no e-residences, although all the services have been transferred to electronic format. I thought, if in our country there is also such an opportunity, which It can provide additional income, why not? Moreover, our tax system is able to attract foreign entrepreneurs, "said Deputy Minister of Digital Transformation of Ukraine.

The ministry plans that the Ukrainian e-residency program will provide the opportunity to establish individuals’ entrepreneurship (with a tax rate of 5% of turnover) and a legal entity (with a tax rate of 18% of net profit). The “issue price” for obtaining Ukrainian electronic residency is the hryvnia equivalent of $ 100. In addition, private companies will be able to provide foreigners with accounting support, if necessary.

An application for an e-resident status in Estonia costs about the same - 100 euros, but if a legal entity is established, 190 euros will have to be paid. In addition, Estonian companies also offer accounting services at a cost from 50 to 300 euros per year.

According to Deputy Minister of Digital Transformation, unlike in Estonia, Ukrainian e-residents will immediately receive the geographical address of the office in Ukraine, where official correspondence will come. In Estonia, this additional service is paid. And also the work is underway to make opening a bank account in Ukraine automated, with the possibility of remote verification, while Estonian banks require a personal presence of the client and additional justifications for opening an account (after scandals involving the laundering of Russian money, the status of e-resident for Estonian banks are not significant enough). However, this restriction can still be circumvented by using the services like Payoneer, Holvi, Revolut, Transferwise Borderless.

The very mechanism for obtaining e-residency in Ukraine will be almost identical to the Estonian one: registration, consideration of an application, obtaining a tax number, and then receiving electronic digital signature. “We have not yet decided how the e-resident will be identified: using an ID card, Mobile ID or Smart ID. However, most likely, foreigners will have to visit the Ukrainian embassy at their place of residence to leave fingerprints: this is required by international financial legislation, " Deputy Minister of Digital Transformation explains." Now we are at the stage of studying the legislation and working out the amendments that will be necessary to make. I hope that by the end of the year we will manage to do this and introduce the corresponding bill to the Verkhovna Rada to start a pilot project already in the spring.

"In the long term, the e-residency program can really benefit the country's economy, given the rather favorable taxes for foreign entrepreneurs at the 5% rate for individuals. I think this will be of most interest to foreign IT and service workers who can work remotely. But the amount of taxes on a common basis is practically no different from other countries, so the establishment of a legal entity does not bring significant benefits for e-residents. In the case of Ukraine, the introduction of an e-residency program is an attempt to respond to an existing trend, "says Ruslan Sobol, head of the Association of Entrepreneurs.

* * *
Until now, only two states the world have implemented the e-residency program - Estonia and Azerbaijan. According to the UN, in the ranking of e-government development from 2014 to 2018, Ukraine climbed from 87 place to 82nd (in 2018 Estonia took 16th place, and Azerbaijan - 70th). Given the low pace of development of e-government in our country, the chances that Ukraine will manage to take third place in this list of "cross-border digital powers" are very doubtful. The new government sees its way into the digital age at a much faster pace, with leaps and bounds, in a hurry to catch up with lost profits. Ukrainian IT specialists receive the highest praise from the state as a locomotive for increasing GDP and are valued worldwide as professionals in their field. However, the state itself continues to speak with them in an outdated language, forcing them, in turn, to receive e-residency with more flexible and convenient tools (for example, PayPal) in Estonia.

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