The IT industry is one of the most promising and fast-growing sectors of Ukraine’s economy, demonstrating positive development dynamics from year to year. The relevant area is not regulated by special legislation, and the state does not apply unique mechanisms for the activities of IT market participants.
In 2020, the Ministry of Digital Transformation proposed the Diia City project, one of the main goals of stimulating the development of the digital economy.
On August 11, 2021, the President signed the Law on Special Legal Regime for the IT Industry “Diia City”, which was adopted by Parliament on July 15, 2021. The law came into force on August 14, except for some of its provisions.
The regime establishes a “special legal regime” for its participants, who will have additional options and conditions for conducting activities in the IT field. The regime is unlimited for a specific period but is set for at least 25 years. Special requirements for acquiring residency, taxation, relations with IT specialists are introduced.
The acquisition of the status of a participant in the “DiiaCity” regime is voluntary. The regime is regulated by the Ministry of Figures, and only companies (enterprises) registered in Ukraine, which have mandatory criteria, can acquire the status of a resident of Diya City, including:
Separately, new concepts for Ukrainian legislation are being introduced, such as the gig contract, the gig specialist, and the provisions of the NCA (Non-Compete Agreement) are being enshrined.
At the end of last year, the Verkhovna Rada passed the Law № 1946-IX, “On Amendments to the Tax Code of Ukraine to Stimulate the Development of the Digital Economy in Ukraine,” which was signed by the President.
Diya City resident companies will be able to choose between paying income tax at the rate of 18% and withholding tax at the rate of 9%.
If the company becomes a resident of Diia City, it can choose a system under which it has to pay only 9% tax on withdrawn capital from dividends to the founder from certain operations. Instead, 18% does not pay income tax.
The corresponding tax of 9% is paid on certain transactions specified by law.
Resident companies “Diia City” will be able to attract specialists both based on an employment contract (employees) and based on gig contracts. In both cases, special rates of personal income tax (PIT) of 5% were introduced instead of the usual 18%.
Today, the format of work of companies with IT specialists who have the status of private entrepreneurs and provide their services to the company under a contract is widespread. Residents can still work with private entrepreneurs, but there are restrictions on the number of services they receive from private entrepreneurs. Thus, from 2024 it is 50%, from 2025 – 20% of expenditures for previous periods.
Companies with an annual income not exceeding UAH 40 million and those who have chosen income tax can work with private entrepreneurs without restrictions at all times.
The introduction of tax regulation is one of the critical stages in implementing the “Diia City” regime, as the direction concerns and will affect companies’ profits.
Today, there is a law on the special regime, which is the primary document of the legal regime, as well as a law introducing the conditions of taxation of the regime “Diia City”. However, no additional regulations have been adopted for the operation of the law (instructions, regulations).
The current documents are the basic ones based on which the Government should implement specific mechanisms for implementing the regime.
If the company intends to become a resident of Diia City, there is no such possibility yet, as neither the Diia City register has been introduced nor the procedure according to which, in fact, one can acquire or revoke the status of a resident. In addition, the form of the resident’s compliance report “Diia City”, the procedure for submitting and reviewing reports, the procedure for notifying the authorities about the conclusion of a gig contract, etc. have not been determined. The Ministry of Finance announces the full launch of the regime in early 2022.
Also, for the functioning of the special tax regime, the tax service must be provided with mechanisms to ensure the regime’s operation (instructions on calculations, reporting forms, invoices for relevant taxes, etc.).
Accordingly, when the appropriate mechanisms and procedures for acquiring a status and paying taxes by residents are implemented, companies will be able to take measures to obtain residency and take advantage of the options provided by Diia City.
The author of the material:
IT lawyer at the Trustme Law Firm