FOP, civil-law or employment contract in a Ukrainian NGO: what an audit finds

The form of contract is determined by the substance of the work, not the title of the document: if a person performs the duties of a position every day and receives a salary, it is an employment contract under Article 21 of the Labour Code; if they deliver a result or provide a service, it is a civil-law contract or a contract with a sole proprietor (FOP); if they work for free, they are a volunteer. A wrong form turns into reclassification, additional taxes and disallowed costs at audit.

NGOs and foundations most often go wrong in three places: a FOP consultant in fact works as a staff member, a non-resident works without clarity on how their income is taxed, and volunteers are reimbursed without a contract. Below we go through the rules the auditor and the State Tax Service (STS) apply to each form, and what the documents must show.

What has changed and which rules apply

What matters here is not news but the basic rules in the current versions of the codes, which we checked on zakon.rada.gov.ua. In a grant audit, HR documents are reviewed together with financial ones, so both functions should know these rules. Under Article 21 of the Labour Code, an employee performs the work defined in the agreement, and the employer pays wages and provides working conditions. Under Article 24, an employee may not start work without an employment contract formalised by an order and a notification of hiring to the tax authority. Code text: zakon.rada.gov.ua.

The Civil Code distinguishes a services contract (Article 901: the service is consumed in the course of the action, and the provider renders it personally, Article 902) from a works contract (Article 837: the work is done at the contractor’s risk and the result is handed over to the customer). Article 177.8 of the Tax Code expressly provides for a substance test: the exemption from withholding personal income tax (PIT) on payments to a FOP does not apply if the relationship under the contract is in fact employment. Tax Code text: zakon.rada.gov.ua.

Who is affected

• NGOs, charitable foundations and associations that engage consultants, trainers, accountants and project coordinators;
• organisations working with foreign experts: under Article 170.10.1 of the Tax Code, Ukrainian-source income of non-residents is taxed under the rules and rates for residents, subject to specific provisions for non-residents;
• organisations with volunteers, especially if their travel, meals or accommodation are reimbursed;
• companies that work with many FOPs: Article 177.8 of the Tax Code and Article 265 of the Labour Code apply to any employer.

What to do and by when

The review is best done before year-end and, if you have a grant, before the final project audit.

1. Prepare a register of everyone who worked for the organisation in 2026, with the form of contract, amount and period.
2. For each FOP, check: is there a copy of the registration document, do the services match the registered activities, do the contract and acts describe a specific result rather than “performance of duties”.
3. For each civil-law contract, check that PIT and military levy were withheld, USC was accrued and an act was signed for each stage.
4. If signs of employment are obvious (daily work to a schedule, the same amount each month, reporting to a manager), discuss with a lawyer and accountant converting to an employment contract. Do not let the person start work without an order and notification.
5. For non-residents, determine whether the income is Ukrainian-source income, and keep the tax calculation and the documents it relies on.
6. For volunteers whose expenses you reimburse, sign a written agreement: under Article 9 of the Law on Volunteer Activity it is mandatory in that case and must set out the tasks, period, rights and duties, liability, termination terms and the procedure for reimbursing expenses.

Common mistakes and risks

• A FOP consultant with a schedule and a job title. If the tax authority finds the relationship is in fact employment, the Article 177.8 exemption does not apply and PIT should have been withheld. Separately, Article 265 of the Labour Code sets a fine for letting someone work without an employment contract: 10 minimum wages per worker, and 30 for a repeat within two years.
• A civil-law contract “instead of salary”. A services contract with a fixed monthly fee, no description of services and no acts looks like a disguised employment contract.
• Acts with no content. “Consulting services for March” does not show what the organisation actually received. Donors disallow such costs even when taxes are correct.
• A volunteer receiving monthly “compensation”. Under the law, volunteer assistance is unpaid. Fixed payments without expense documents or a contract are not reimbursement under Article 11 and raise tax questions.
• Reimbursement above the limits. Volunteers’ travel expenses are reimbursed within the limits set for civil servants and employees of budget-funded institutions.
• A non-resident without a calculation. The organisation paid a fee to a foreigner without determining whether it is Ukrainian-source income. The question will come back at audit.

We set out the full list of documents for FOP contractors in grant projects separately: FOP contractors in a grant project: when the donor disallows the cost. On supporting salaries and timesheets, see personnel costs in a donor project.

FAQ

How we help

When auditing NGOs, we check contracts, acts and taxes for each contractor, and in bookkeeping we help choose the form of contract before work begins. See NGO audit, NGO accounting and HR administration. We cover HR issues in grant projects in our free webinars for NGOs.

Prepared by the MK Audit team