Risks and Legal Aspects of IT Outsourcing To Ukraine: What Businesses Should Know

The software outsourcing industry in Ukraine has been growing at a stable rate since the early 2000s. So far, Ukrainian software development firms have competitive rates, and the quality of projects coded in Ukraine is good for the money paid. A growing IT nation produces high-quality and innovative software for Europeans, Americans, Israeli, and others. Ukraine has skilled and educated people who get the jobs done. They work with all modern technologies on software for projects not yet released to the markets, support existing applications, and provide reengineering services.

Outsourcing to Ukraine has significant benefits of software development for businesses, but many questions arose during the decision process: Is it safe to outsource to Ukraine? What risks of software outsourcing to Ukraine must investors evaluate? What are the political and economic threads for outsourcing? Do Ukrainian IT agencies pay enough attention to legal regulations, data protection, and privacy? Let’s find out in our article.

Key Risks of Software Outsourcing to Ukraine

Russia’s War in Ukraine

Damaged and destroyed infrastructure, constant shelling, occupation of regions, and labor migration became the factors that most affected the activity of the Ukrainian economy during the war. Among the export-oriented industries, only the IT industry increased its exports compared to last year, while the others suffered significant losses. The overall export of IT services in 2022 was up to 6 billion dollars, which is a 9,9% increase compared to 2021.

Despite all challenges and complications, IT companies do not stop reviewing motivational packages and perks for their employees and contractors. Korn Ferry’s 2022 IT Compensation Study reveals several key trends in the IT industry:

• ⇒despite the war, most software companies plan to increase the compensation budget and keep involving new projects;
• ⇒the salary level differs significantly depending on the position of an IT specialist or employee, and it has been influenced a lot by the exchange rate;
• ⇒the regional distribution of rewards is not balanced currently due to the migration of Ukrainian programmers and the relocation of Ukrainian tech companies to the western regions of Ukraine.

Despite the difficulty of doing business in wartime, the IT industry continues to pay taxes. Some companies have even paid taxes in advance to support the state in such a difficult period. Meanwhile, the tax activity of companies and entrepreneurs is only increasing. As of November 1, 2022, the number of taxpayers increased by 7.5% compared to last year.

The challenge most IT businesses have faced is expansion. As for 2021, 54.7% of IT companies planned to open new offices and branches in 2022. However, only a quarter managed to do it, and others couldn’t make it because of the war. As a result of the full-scale invasion, 70.8% of IT companies conducted an unplanned relocation (to more western regions, like Lviv, Ivano-Frankivsk, Ternopil, etc., or abroad in that or another European country), a quarter of them – full. Nevertheless, they keep working at almost full capacity and even manage to hire more people.

Political Risks

Ukraine just lived through years of mass protests, government change, and the Russian invasion. A lot of experience to take! The good news is that the period of political uncertainty ended. The government supports the course for Euro-integration, economic reforms, and peace in Eastern Ukraine.

Many reforms to support the Ukrainian business, IT sector, and foreign investors have been adopted in recent years. The clear pro-EU government policy raises the chances of further law harmonization, making entrepreneurship more accessible, and removing capital flow barriers.

The government does not interfere in the work of the IT industry, but on the contrary, stimulates its growth. In this political environment, the IT industry is likely to become the driving force of Ukrainian economics as it already has a booming tech ecosystem.

Economic Risks

Ukraine’s current economic outlook is far better than many appreciate. Its Association Agreement with the European Union contains hundreds of rules for the opening of various markets. Ukraine has legislated much already, but in many cases, formal rules have yet to translate into the kind of full implementation that would make European competitors want to enter Ukraine on a broader scale.

Over the past decade, Ukraine’s IT sector exports have grown by 540 percent. This puts it in third place among Ukrainian exports. As IT services have recently become one of Ukraine’s largest export commodities, the Ukrainian government is making every effort to protect both parties and reassure everyone that quality and reliability mean much to us.

Ukrainian software engineers earn far above the average level in Ukraine. That is why the industry attracts many new workers (e.g., business analysts, project managers, recruiters, product managers, front- and back-end programmers, etc.). IT sectors thrive in an environment where universities, governments, corporations, service providers, and venture capitalists all interact. Ukraine is more and more competitive globally.

The integration of Ukraine with the EU, which includes the coordination of the EU digital union, will contribute to Ukraine’s further inclusion in the global information technology market.

The IT industry is one of the few in Ukraine which can show stable growth capabilities with an increase in tax payments to the budgets during the crisis. According to the State Statistics Service’s official data, in 2019, Ukrainian companies exported IT services abroad for a total of $ 2.43 billion. At the same time, 2020 poses for the industry not only the problems of Covid-19 but also the tax innovations of legislators.

In March 2020, the Verkhovna Rada of Ukraine adopted several laws designed to mitigate the economic crisis’s negative impact. In particular, for the most popular among IT professionals – the third group of taxpayers, the single tax limit has been increased from 5 to 7 million UAH.

Ukrainian IT Legislation and Laws For Foreign Customers

For sure, each potential client is interested in the legal aspects of cooperation. Ukraine is a civil law country. According to Ukraine’s laws, foreign investors may carry out a wide range of foreign investments in the IT sector: 

1. Create new jointly-owned or wholly foreign-owned enterprises.
2. Enter into production or cooperation arrangements.
3. Hire a company/freelancer. 

Taxation Regulations for an IT Sphere

The most common business models used by domestic or foreign IT entrepreneurs in Ukraine are a Limited Liability Company (LLC) or a Joint-Stock Company (JSC). International companies often register wholly-owned subsidiaries as LLCs. For the most part, this is due to the rights and flexible business models available since the introduction of new legislation regarding LLCs. 

There are two central taxation systems for private entrepreneurs: General tax rules and a simplified tax regime.

Concerning payroll taxes, employees’ salaries are subject to the following charges: income tax – 18%, military levy – 1.5%, and single social payment – 22%. 

A significant number of IT specialists in the whole talent pool of Ukraine work with companies under the private entrepreneurship model. The form of business is simple to register and maintain, and besides, it can offer good tax savings through a simplified tax regime for such a structure.

The Ukrainian taxation system is very beneficial for IT companies, as it means that they conclude contracts with the company. Most of the taxes levied on the Ukrainian IT sector come from people registered as private entrepreneurs. 

According to the law, the developers are responsible for the entire product development process. 

The private entrepreneur provides services to the LLC as an independent contractor (freelancer). Thus, the LLC will not be obliged to pay taxes for employment, making it a desirable prospect for many IT businesses. 

This situation is very favorable for the customer. It also means preserving information, transferring product rights, employee loyalty, and lower software development rates.

Cooperation Models with Outsourcing Company in Ukraine

The client outsourcing to Ukraine usually has a choice of 2 of the most popular options: a fixed price model or a time and material-based collaboration with a dedicated team or milestone pricing options.

1. Fixed price model

This model assumes a fixed payment for the project. As such, it works best for companies prioritizing cost planning over flexibility. The FP approach’s key features are a fixed budget, deadline, scope, higher rates, and potential quality tradeoffs.

As a client, you might be better off considering a pricing model like this if your outsourcing project has exact requirements that will certainly not change over time. A specific time frame must reach a particular milestone.

2. Time and materials

The time and material model is suitable for large projects with unclear or constantly changing requirements. Then payment is made for the achieved result and for the actual time spent. The project time estimate made with this pricing model is more realistic, and therefore the customer benefits more from this innovative approach.

Besides, the customer bears significant responsibility for the implementation of the project. He is responsible for adding or removing specific features during a project. The overall business process is more transparent and flexible with the types of T&M pricing strategies.

IT specialists are then better motivated to deliver modern products within a reasonable time frame.

It is clear that the time and materials pricing model seems to be more profitable in many ways; minimizing risks for large and complex long-term projects merely is inevitable.

Legal Aspects: Contracts with Ukrainian Developers

When you select a software house to work with, you want to know the game rules. They have gone through hundreds of previous projects, so they are most likely the ones with excellent technical expertise and hands-on experience for your project.

You are about to face the first challenge: signing a contract. Let’s take a look at the essential documents for software development outsourcing services. We will define the key terms that can often be confusing or misleading. It will help you arrange a business relationship that is safe for both parties.

1. NDA/NCA Clauses 
2. Master Service Agreement (MSA) 
3. Statement of Work (SOW)
4. Other upon request.

Non-Disclosure Agreements (NDA) or Non-compete Agreements (NCA)

A Non-Disclosure Agreement is an agreement between two parties who agree to protect confidential information disclosed in the course of business. Pay attention to the main provisions, which should include the definition of confidential information, exceptions to the concept of “confidential information,” obligations, and conditions of the contract. For example, in the world of programming, general business ideas, codes, databases, documentation, development tools and methods, information processing methods, etc., can be considered confidential information.

At the same time, NDA in the IT business has long been perceived not so much as a legal instrument but as an element of business etiquette that regulates some rules of communication at different stages of cooperation. Software development companies conclude NDAs with clients at the pre-project stage for the duration of the project.

10 key clauses to have in non-disclosure agreements:

• ⇒Definition of confidential information.
• ⇒The parties.
• ⇒The terms and duration.
• ⇒The permitted use of the information.
• ⇒The legal obligation to disclose.
• ⇒The return of the information.
• ⇒The jurisdiction.
• ⇒The remedies.
• ⇒Responsibility for legal fees.

Non-compete agreements might be signed per client request. The purpose of NCA is to protect the legitimate interests of the business. It includes intellectual property, client information, business plans, or trade secrets to avoid erosion of sensitive information.

The contract limits the developer from working with any similar business for a certain amount of time after the agreement’s termination. That applies first to work, which concerns a specialized area. 

Statement of Work (SOW)

The Statement of Work (SoW) consists of a narrative description of the supplied software services. SOW is one of the first documents you will sign to provide a complete picture of a project before you start planning and implementing it.

SOW captures and defines all aspects of your project. It is an extremely detailed document, as it will lay the foundation for the project plan.

It’s also a way to share what a project entails with those working on it, whether they are collaborating on a project or working on a contract. This includes suppliers and contractors applying for a project.

It is also useful for the project manager as it provides the structure on which the project plan is built. The terms of reference will also help to avoid conflicts in the project. SOW helps keep everyone involved in a project on the same page and minimizes confusion with detail and clarity.

What’s included in the SOW for software development projects?

• ⇒Project description.
• ⇒The purpose of the project.
• ⇒Requirements (functional and non-functional requirements and constraints).
• ⇒Proposed solution (approaches to project estimation and implementation, design, and support).
• ⇒Scope of works and description.
• ⇒Milestones or phases.
• ⇒Deliverables.
• ⇒Task list and estimates.
• ⇒Deadlines and schedule.
• ⇒Requirements.
• ⇒Contract mode and payment model.

Master Service Agreement (MSA)

IT vendors like DevCom seek long-term, ongoing relationships with 100 percent of clients. Some of our clients have worked with us for over 16 years already. However, that relationship is typically structured across multiple projects/scopes of work. As we approach a new project opportunity with a client, neither party wants to review or change generic terms and conditions.

Master Service Agreement (MSA) defines a contract between an IT vendor and a client. It serves as the foundation for the relationship that can then reference for future project-based agreements you draw up to keep the project agreements as focused and streamlined.

MSA guides the IT outsourcing company and its client and forms the basis of their relationship. It is a generic set of legal provisions and basic business protections necessary or recommended in outsourcing transactions. Put merely, MSA must state every vital aspect of software outsourcing to convey business expectations and provide financial guarantees to both parties. It should also be a clear and understandable guide at every step of the SDLC.

For that reason, the MSA document is typically structured into the following sections:

• ⇒MSA’s general terms.
• ⇒Goals and objectives for the project.
• ⇒Scope of services.
• ⇒Conditions for how the work will be performed.
• ⇒Fees, expenses, and payment and acceptance of services.
• ⇒IP rights and ownership.
• ⇒Terms and clauses for termination.
• ⇒Company and client warranties and compatibility.
• ⇒Indemnity.
• ⇒Confidentiality terms.
• ⇒Restrictions on disclosure and use.
• ⇒Non-solicitation of employees.
• ⇒Liability and warranties.
• ⇒Steps for how legal disputes will be handled.
• ⇒Other conditions.

Why Ukraine is a perfect destination for IT outsourcing

Why do so many companies and investors choose to outsource to Ukraine? Why would they? What makes Ukraine outsourcing so special? Let’s tackle it more and outline the main reasons you should do that too.

Ample Expertise

Outsourcing software developers from Ukraine guarantees your product quality due to their deep expertise and constant learning and improvement. Regarding a pool of skills and proficiency, Ukrainian IT specialists are considered the most qualified in Central & Eastern Europe.

Priorities

Software development outsourcing to Ukraine is different as Ukrainian specialists put emphasis on different market segments. For example, now in Ukrainian IT, the focus on digitization in the banking system is at a relatively high level due to high competition in this segment. This is local “know-how” in the tech industry. Of course, it can be considered a strength of the market’s technological achievements.

Tax system

The Ukrainian tax system makes IT outsourcing in Ukraine extremely beneficial and accessible. Nowadays, employees of the IT industry pay a tax of 5% directly to the budget from their salaries since most specialists work with IT companies as private entrepreneurs of the third group.

Soft skills and knowledge of the language

Outsourcing software development in Ukraine is smooth and with no barriers due to the fact that the average IT specialist can easily communicate in an international language like English, and companies pay great attention to soft skills. It makes it possible to provide high-quality and friendly cooperation.

Price

Once you start doing business in Ukraine, you may be surprised by the budget-friendly prices here. The average hourly rates vary between $30-80 dollars. It all leads to an advantageous cost ratio for your company.

Education

IT business rating in Ukraine is so high not only due to the high level of recruitment but also due to the rapid development of tech education. The number of software developers crossed the line of 200k specialists in 2021, with 20-25k tech graduates each year. It makes a developer community expand in a fast-moving manner so far.

Conclusion

Currently, IT companies in Ukraine operate under the general legislative field of Ukraine. Thus, the Ukrainian government actively supports the software development industry through reforms and laws on taxation, data protection, employment, and the export of services. The legal and economic spheres are now actively adapting to the needs of international business, so the signing of a contract and the transfer of funds is no longer a reason for consideration.

The legal aspects of IT outsourcing to Ukraine are somewhat typical of contracting engineering jobs. Therefore, to get started with Ukrainian IT companies, you need to sign a pack of usual agreements: Service Agreement, Statement of Work, and NDA.

Summarizing all those mentioned above, it is undoubtedly clear that outsourcing to Ukraine is safe. The only thing to consider – is people. The most challenging task is to choose a reliable company and people who inspire trust, like skillful Ukrainian software developers. Sometimes it happens that right after the first introductory call, it becomes clear whether there is a people match or not. A kind of kindred spirit in business. Because trust means a lot, and such cooperation can last for many years.

With all of the mentioned factors in mind, it might be the best shot to contract DevCom – a Ukrainian development company with a perfect reputation in the global market and local outsourcing market. Since 2000, the Devcom dedicated software development team has been providing a broad range of enterprise software solutions, from custom development, professional IT consulting services, Cloud hosting, and DevOps to software support.

If you think there’s some way we can help, contact us now.