Tax regime for Diia City: what to expect?
IT

Tax regime for Diia City: what to expect?

On December 14, 2021, the Verkhovna Rada passed in the second reading the law № 1946-ІХ On Amendments to the Tax Code of Ukraine to Stimulate the Development of the Digital Economy in Ukraine. ” This is one of the stages in implementing the Diia City regime. We have already written about the regime itself, issues, and what to expect next. In this article, the DOU editorial board and Sergiy Barbashin, an IT attorney and managing partner at the Trustme Law Firm, decided to look into the nuances of the 1946-IX law and the tax conditions for Diia City.

Let’s compare the general conditions of taxation and what is offered in Diia City

For IT specialists

For professionals, taxation in Diia City is lower than in the case of employment in the state. But if you compare with the taxes of private individuals, to their size is added payment of military duty of 1.5%.

General conditions Diia City conditions
Private entrepreneur of the 3rd group Staff employee The tax rate for the gig-specialist
The single tax of 5% – on income

The single social contribution is 22% of the minimum wage

Personal income tax – 18% of salary

The only contribution is 22% of the salary

Military tax – 1.5% of salary

Personal income tax – 5% of the amount of remuneration

The single social contribution is 22% of the minimum wage

Military fee – 1.5% of the amount of remuneration

For the companies

Companies will be able to choose between paying tax on general terms (income tax) or special (withholding tax).

General conditions Diia City conditions
Income tax – 18% (on the general taxation system)

Dividend taxes – 5% and 1.5% of the military tax

or

Single tax – 5% or 3% + VAT (income limit UAH 7 million / year)

Dividend taxes – 9% and 1.5% of the military tax

Income tax – 18% or withholding tax – 9% of certain transactions

Let’s consider how it is spelled out and enshrined in the law in more detail.

What changes does the law propose № 5376

Companies get a choice between tax systems

Diia City resident companies will be able to choose between paying income tax at the rate of 18% and withholding tax at 9%.

Now, the company pays 18% income tax on the general taxation system and then the dividend tax to the founder (5% personal income tax and 1.5% military tax). And in the simplified system of 3 groups of taxation – 5% of the single tax is paid and taxes on dividends – 9% and 1.5% of the military tax, but the income limit for simplified people is UAH 7 million per year.

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.

We remind you that the income tax on a general basis is paid from the profit, which is calculated as the total amount of income received fewer expenses incurred. The nuances of taxation are described in Section 3 of the Tax Code.

This type of taxation, such as the withheld capital tax, has not been used in Ukraine. This tax is paid in the amount of 9% of the following transactions:

  • payment of income from joint activities for the benefit of residents of Diia City who does not pay tax on withdrawn capital;
  • payment of earnings from shares (dividends);
  • operations on providing property (works, services) free of charge and non-refundable financial assistance to persons who are not residents of Diia City – payers of the withheld capital tax;
  • payment of interest, commissions, compensations, fines, penalties for raising and/or using funds;
  • royalty payment transactions.

Other types of transactions and features of taxation are specified in paragraphs. 135.2, 137.10, 141.91 of the adopted law.

Conditions for employees under employment contracts and gig specialists are equal

Diia City resident companies 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%.

The Diia City’s residents pay income to the specialist in the form of:

  • salaries;
  • royalties for the creation of an official work and the transfer of rights to official positions;
  • rewards under the gig contract and for creating and transferring rights to products made to order.

In addition, a single social contribution (SSC) is set for the involved specialists – 22% of the legally defined minimum wage, which from 01.01.2022 will amount to UAH 1,430.

Please note that Diia City residents are not exempt from paying a military fee of 1.5% of the amount paid to employees and gig specialists.

If the annual income is 240 thousand euros, the amount of income that exceeds this limit will be paid PIT at a rate of 18%.

Tax incentives and restrictions in the Diia City

Payment of dividends to individuals from Diia City residents will not be taxed, provided that the company pays them no more than once every two years and is a payer of the withheld capital tax. Income from the sale of a stake in a resident company Diia City will be taxed at a rate of 0%, provided that the individual has owned a stake for more than a year. There is also a tax rebate for individuals in the case of buying shares in a startup company that is a member of Diia City.

The opportunity to cooperate with individual entrepreneurs remains. However, the legislator clearly wants to reduce the popularity of cooperation with companies and private entrepreneurs on a simplified taxation system for residents of Diia City. The number of services that Diia City resident companies can afford with private entrepreneurs is gradually decreasing. Thus, from 2024 it is 50%, from 2025 – 20% of expenditures for previous periods. If a resident of Diia City exceeds the specified limits and, depending on the chosen system, there will be the following consequences:

  • on the general system of taxation amounts above the limit increase the financial result of the tax period (or more simply – the amount of income from which it will be necessary to pay income tax);
  • when applying the withheld capital tax, amounts exceeding the above limit will be taxed at the rate of 9%.

Companies with an annual income of less than UAH 40 million that have opted for income tax can work with sole proprietors without restrictions at all times.

Conclusion

We hope that the legal regime of Diia City will work in favor of the IT business without the intention to create additional restrictions on the rapidly developing field.

Before the regime functions, a profile register must be established, and a procedure for acquiring resident status must be introduced. I would also like to find answers to questions about the requirements for residents, the review of complaints by the appeals commission, the constitutionality of the Non-Competition Agreement (NCA), and others.

If you have additional questions about the regime’s operation, we encourage you to discuss them in the comments.

The material is prepared for https://dou.ua.

Link to the article

The author of the material is

Sergiy Barbashin – the IT attorney, managing partner at Trustme Law Firm