The relocation of Ukrainian businesses abroad, which in 2022 took the form of an emergency evacuation, is now taking on the character of strategic planning aimed at diversifying risks, enter EU markets, and ensure business continuity, according to Kateryna Danilova, a partner at the law firm Barristers, JL.

“While in 2022 relocation often took the form of an emergency evacuation, it is now taking on the characteristics of strategic planning aimed at diversifying risks, entering EU markets, and ensuring the continuity of operations,” she told the Interfax-Ukraine news agency.

Danilova noted that “since the start of the full-scale invasion, Ukrainian businesses’ interest in relocation mechanisms has remained consistently high, although its dynamics have fluctuated depending on the situation on the front lines and the overall economic climate.”

According to the lawyer’s observations, the information technology (IT) sector has been the most active in terms of relocation, due to its mobility, focus on global markets, and minimal dependence on physical assets.

“For IT companies, relocation often means opening offices in EU countries to retain their teams, which also allows them to guarantee continuity and stability of service delivery to clients and simplifies access to international financial infrastructure. Many companies based in Diya.City are establishing overseas hubs while keeping a significant portion of their development operations in Ukraine,” she said.

In addition, according to Danilova, manufacturing enterprises in the light industry, woodworking, component manufacturing, and food industries are showing high levels of activity in terms of relocation.

“The main driving force for them is the desire to protect their production facilities from physical destruction, bring production closer to European consumers, expand their sales market, and so on,” she said.

Companies in the agricultural and processing sectors are also actively pursuing relocation, seeking opportunities to establish processing facilities in neighboring EU countries to gain market access without logistical complications at the border.

In addition, there are companies in the creative, consulting, and marketing industries, which, like the IT sector, are mobile and are actively integrating into the European market.

Commenting on the geography of relocation, Danilova noted that the choice of a relocation destination depends on many factors, including geographic proximity, logistics, business conditions, the availability of support programs, the tax climate, and cultural and linguistic affinities, among others.

Currently, the main destinations for Ukrainian businesses are Poland, which leads in the number of relocated Ukrainian companies, and Germany, where Ukrainian businesses are attracted by economic stability, access to the EU’s largest market, and high purchasing power, although this country “is characterized by a higher level of bureaucracy and tax burden.”

In addition, Ukrainian businesses are relocating to Romania and Bulgaria, which are gaining popularity due, in particular, competitive tax rates and lower labor costs; the Czech Republic and Slovakia, which are traditionally attractive due to cultural proximity and favorable conditions for small and medium-sized enterprises; and the Baltic states (Lithuania, Latvia, Estonia), which “are attractive to technology and innovation companies due to their developed digital infrastructure and favorable investment climate.”

However, Danilova emphasized that “it is legally impossible to transfer an employee from a Ukrainian legal entity to a foreign one, since these are different business entities operating under different legal systems”; nevertheless, in practice, companies use a number of mechanisms.

These include, in particular, termination of employment in Ukraine and re-employment abroad—which is the most common and transparent mechanism— though it requires the employee to obtain a residence and work permit in the country of relocation, or a business trip, which is risky for long-term work abroad.

In addition, companies use mechanisms involving the conclusion of a civil law contract, whereby the employee registers as a sole proprietor in Ukraine (or as an individual entrepreneur in the country of relocation) and enters into a service contract with a foreign company. This model is flexible but carries the risk of additional tax assessments and penalties.

Another common mechanism is the Intra-Corporate Transferee (Intra-Corporate Transferee), which is used in EU countries that have implemented the relevant EU Directive, creating simplified conditions for the temporary transfer of key managers, specialists, and trainees within a single group of companies. This, in particular, requires the existence of legally affiliated Ukrainian and foreign companies. Another popular mechanism is outstaffing, or the “leasing” of employees, which involves removing employees from the company’s payroll on the condition that they are formally employed by a foreign company; however, Ukrainian legislation does not contain clear regulatory provisions governing such legal relationships.

Commenting on the pitfalls of Ukrainian legislation regarding relocation, Danilova noted a number of restrictions within the Ukrainian legal framework, including foreign exchange restrictions, controlled foreign corporation (CFC) rules, transfer pricing (TP), as well as restrictions on traveling abroad and transferring assets.

In addition, pressing issues related to relocation include banking compliance and opening a bank account for a new company in the EU founded by Ukrainian citizens, the complexity of managing a dual structure, the loss of preferential regimes upon the actual transfer of operations abroad, particularly for IT companies, which may lose the benefits of the special legal and tax regime under Diya.City, as well as adapting to foreign legislation.

"Relocating a business abroad is an effective tool for minimizing the risks of war, but at the same time, it is a complex legal and organizational project. The success of relocation directly depends on comprehensive strategic planning that takes into account all legal, tax, financial, and operational aspects,” she said.