The Polish limited liability company (sp. z o.o.) and its Ukrainian counterpart, the товариство з обмеженою відповідальністю (TOV), are legal forms popular among entrepreneurs in both countries. A comparison of these normatively similar constructions leads to the conclusion that they share many common elements that make them attractive legal vehicles, especially for small and medium-sized business. Both companies acquire legal personality and are therefore separate entities capable of entering into contracts, acquiring rights, incurring liabilities or appearing in legal proceedings. The shareholders in both cases are not personally liable for the company's obligations and their risk is limited to the amount of the contributed capital. The structure of the bodies is analogous in both cases: the board of directors (director or board of directors in a TOV) conducts day-to-day operations, the shareholders' meeting takes strategic decisions, and a supervisory board may be established.
Incorporation of a company
The process of establishing a Polish Ltd. and a Ukrainian TOV differs in terms of formal requirements, costs and the time needed to register them.
In Poland, a sp. z o.o. may be established by one or more natural or legal persons, including foreigners, with no restrictions for EU/EEA citizens.
However, a Polish limited liability company cannot be established solely by another single-member limited liability company (Article 151 § 2 PCCC). This is one of the significant practical differences compared to the regulation of the establishment of a TOV. Ukrainian capital company law is very liberal in this respect and in principle does not provide for restrictions here. This means that, for example, a Polish single-member limited liability company can establish a Ukrainian TOV and be its sole shareholder (with exceptions for specific industries).
The minimum share capital in a Polish Ltd. is PLN 5,000 and the shares must be worth at least PLN 50. The articles of association generally require the form of a notarial deed. It is possible to use the simplified S24 system, where registration takes place online on the basis of a model contract.
The registration of a limited liability company, as with all commercial companies under Polish law, takes place through non-procedural civil proceedings and the Register of Entrepreneurs of the National Court Register (KRS) is maintained by common courts.
The process of registration with the KRS is formalised. Costs include court fees, notary fees (depending on the amount of capital) and tax on civil law transactions.
The use of the template provided in the S24 IT system does not allow for the regulation of many issues. Therefore, if shareholders wish to introduce non-standard or more advanced solutions to the articles of association, it is necessary to use the traditional way of concluding the articles of association before a notary public. In a company established via the Internet using the S24 system, it is not possible to cover the share capital with an in-kind contribution.
The members of the management board of a Polish Ltd. may be natural persons with full legal capacity. It is not necessary for board members to be Polish citizens. The application for entry of the company in the register of entrepreneurs must be accompanied by a declaration of the members of the management board as to their address for service. If this is an address outside the European Union, a proxy for service in Poland must be indicated. Management board members are appointed and dismissed by the shareholders' meeting.
In the case of TOV, as of 2016 there is no minimum requirement for share capital - its amount is determined by the articles of association, and the contribution may be in cash or in kind. In the case of a cash contribution, the share capital may therefore amount to UAH 1. The articles of association (articles of association), as in Poland, may be either model or individual, giving greater flexibility.
The register of companies in Ukraine is conducted in an administrative system - TOV is registered in the Unified State Register of Legal Entities, Natural Persons - Entrepreneurs and NGOs. Registration is carried out with the so-called State Registrar/State Registrar. Registration can be done faster than in Poland, although the process is also formalised and requires the preparation and submission of relevant documents.
It is worth mentioning at this point that, despite the war, registers and legal procedures in Ukraine operate without major disruptions (except, of course, in areas directly affected by hostilities).
The executive body of a TOV is most often a director acting alone, although a board of directors may be appointed.
Non-residents acting as directors need a work permit and a Ukrainian tax identification number. Also the founder / partner of a TOV must have a Ukrainian tax identification number. Obtaining a work permit for a foreign director is a standardised and less complicated procedure than for other employees.
Liability of company directors to creditors.
The liability of the members of the bodies in a Polish Ltd. and a Ukrainian TOV differs in both scope and rigour.
In Poland, a key risk is liability to creditors under Article 299 of the Commercial Companies Code. Basically, if the enforcement against the company proves to be ineffective and the management board failed to file a bankruptcy petition in due time (i.e. 30 days from the date the company became insolvent, i.e. when the company lost its ability to perform its due monetary obligations), its members are jointly and severally liable towards the company's creditors for the company's liabilities. A member of the management board may free himself or herself from liability to the company's creditors if he or she proves that he or she is not at fault for failing to file a bankruptcy petition in due time, which may result from various circumstances that the court will examine and assess in a particular case.
In TOV, the liability rules are less strict. While a director (or members of the board of directors) is liable to the company for damages arising from a breach of the law or the articles of association, unlike the solution in Article 299 of the Companies Act, there is no provision in Ukraine automatically holding a director liable for the TOV's liabilities in the event of its insolvency.
Polska sp. z o.o. therefore puts board members in a riskier position vis-à-vis creditors.
Company operation and taxation.
The formalism of the operation of the organs in a Polish sp. z o.o., including, for example, the rules concerning the taking of minutes of the activities of its organs, is much higher than in a TOV. Formalism in a limited liability company is also evident when the limited liability company is a sole proprietorship. In such a situation, in some cases it is necessary to observe a special form of legal actions in which the company participates (art. 173 § 1 of the PCCC, art. 210 § 2 of the PCCC). All this affects the manner and speed of the company's operation, but also the practical possibility to exercise the rights of shareholders, the certainty of trading, access to information.
In the Ukrainian TOV there is less formalism, which in turn speeds up decision-making processes. For declarations of the sole shareholder, as a rule, a simple written form is sufficient. In recent years, a number of simplifications have been introduced in response to the difficulties arising from the armed conflict (such as the possibility to adopt resolutions remotely).
Polska sp. z o.o. is subject to corporate income tax, the basic rate of which is 19% of the tax base. For small taxpayers and start-ups, a reduced CIT rate of 9% of the income tax base is available.
The basic rate of corporate income tax in Ukraine, the equivalent of the Polish CIT, is 18% of the tax base. A Ukrainian TOV company is also generally allowed to choose an alternative form of taxation, provided that the taxpayer falls within the statutory annual income limit. In addition to exemptions for certain activities, such as gambling or currency trading, a Ukrainian TOV may benefit from simplified taxation (the so-called Unified Tax) in Group 3, for which the tax rates are - depending on whether the company is a registered VAT taxpayer - either 3% or 5% of the tax base on revenue. To each of these rates, a further 1% is added to the so called "Single Tax". war tax, also calculated on income. The ability to benefit from such low tax rates under the Unified Tax is of particular importance for small, including startups, making TOV an extremely attractive tax vehicle. On top of this, if one considers the fact that Ukrainian VAT is also lower than Poland's (the standard rate is 20%), the prospect of starting a business in Ukraine is certainly worth considering.
Summary.
The Polish limited liability company and the Ukrainian TOV are legal forms with a similar structure, offering limited liability and the possibility for natural and legal persons, including foreigners, to conduct business. Their choice over other forms of business available in each country depends on the scale of the business, budget and preference for legal stability and operational flexibility, as well as tax system solutions. Considering, among other things, that for some industries it is a common condition for participation in tenders to have been in business for some time (e.g. for 2 years in the construction industry), it is worth considering whether to continue to hold off on starting a business in Ukraine.
authors:
Michał Wojtyczek – attorney-at-law, head of the Ukrainian Desk department
Maciej Oczkowski – attorney
This entry contains general information on the legal issue discussed. It does not constitute legal advice or a solution to a specific case or legal problem. Due to the unique nature of each factual situation and the variability of the legal status, we recommend that you seek the assistance of a law firm for legal advice.