On February 8, 2022, during the Diia Summit, the launch of the Diia City regime was announced. It is a special legal and tax space for IT companies. Diia City is positioned as a unique regime, as it provides many innovations, including forms of cooperation with IT professionals and taxation of their remuneration, the ability to attract foreigners without a work permit, changes in corporate tax (the right to choose the object of taxation) and other special conditions.
The main legislative act that determines the principles of operation of Diia City is the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” №1667-IX of 15.07.2021 (hereinafter – the Law). In addition, the Resolution of the Cabinet of Ministers of Ukraine of December 29, 2021 №1445 approved the Procedure for submitting and considering an application for acquiring the status of a resident of Diia City and the Procedure for forming maintaining the register of Diia City.
Diia City mode is not mandatory for the entire IT sector but will apply to those IT companies that become residents. Joining Diia City is voluntary, so companies decide whether to use special conditions or not.
A resident of Diia City can become a legal entity registered in Ukraine and meet the following criteria:
– carries out activities in accordance with the list specified in the Law: computer programming, consulting on informatization, educational activities in the field of IT, data processing, digital marketing, and advertising services, e-sports, activities of providers of services related to virtual assets, cybersecurity, robotics, other activities in accordance with Part 4 of Art. 5 of the Law;
– the percentage of income from activities in certain areas of IT is not less than 90% per calendar year;
– the number of employees and gig specialists is at least 9 people;
– the average monthly remuneration for the employees and gig specialists involved is not less than 1,200 euros.
Startups have not gone unnoticed. They can also become residents and have “relaxed” entry conditions. A startup may have fewer IT staff and professionals and lower pay. However, you must meet the following requirements:
– startup registered within 24 months before the date of application for a resident;
– his income does not exceed UAH 7,585,500 in the previous year, in the year of application, in the year of acquiring the status, and in the following year.
Startups are also given time to meet the general requirements for joining Diia City. Young IT companies are required to set a remuneration of at least € 1,200 and reach a staff of at least 9 by 31 December of the year following the year in which they become Resident City residents. Failure to do so will result in loss of status.
Legal entities that fall under any of the following criteria are deprived of the opportunity to be residents of Diia City:
– registered abroad;
– have the status of non-profit;
– did not confirm the information on beneficiaries and ownership structure;
– related to the aggressor state in matters of ownership of shares (stocks);
– have a tax debt of more than UAH 65,000;
– are providers of services related to cryptocurrency and have not met the established requirements for registration, registration, obtaining a license or other permit;
– carry out activities related to the organization and/or conduct of gambling, except for activities related to the provision of services in the field of gambling;
– other signs established by part 2 of Art. 5 of the Law.
According to the law, the legal regime of Diia City is established for an indefinite period, but not less than 25 years from the date of entry in the Register of Diia City record of the first resident. During this period, Ukraine guarantees the validity of the legal regime and the stability of its conditions. Thus, special conditions have been developed for joining Diia City both for companies already operating and for startups.
To acquire the status of a resident of Diia City, the company applies to the Ministry of Finance with an application for the status of a resident and the documents attached to it. Among the documents may be an application for the election of a special tax system for residents of Diia City and a power of attorney if a representative provides the documents. The application must fill in the details of the applicant, in particular. USREOU code, name, and organizational and legal form of the legal entity indicate the company’s activities as a resident and fill in information about the head accountant.
Applications and documents can be submitted electronically in two ways: through the state web portal of the legal regime Diia City (city.diia.gov.ua) or by sending to the e-mail address of the Ministry of Culture, listed on its official website, to communicate with applicants and Diia City residents. It is important to comply with the requirements of the Laws of Ukraine “On Electronic Documents and Electronic Document Management” and “On Electronic Trust Services,” namely to impose an electronic signature.
The term for consideration of applications and documents by the Ministry of Finance is 10 working days from the date of their receipt. Verification of the information specified in the application is carried out in state registers, databases, information systems. The holders are state bodies, competent foreign states, and international intergovernmental organizations. The decision to acquire Diia City resident status shall be deemed taken after 10 working days from the date of receipt of the application if such application has not been returned without consideration and within this time the authority has not sent the applicant a decision not to grant Diia City resident status. Information about the resident is entered in a special register of Diia City.
The Diia City tax regime provides two types of taxation at the resident’s choice – withholding tax or income tax. The main difference between them is the object of taxation and the tax rate.
Withdrawn capital tax – the object of taxation are individual transDiias (expenses); 9% rate; financial differences do not apply; the amount of the tax reduces the repatriation tax.
Income tax – profit, which is determined by adjusting (determining) the pre-tax financial result according to accounting rules; rate 18%; financial differences are applied, except when the annual income is up to UAH 40 million; repatriation tax is paid separately.
Resident Diia City cannot be a single taxpayer, so in case of acquiring the status of a resident, he is obliged to switch to other taxes and fees. Otherwise, the tax authority cancels the registration as a single taxpayer.
In Diia City, there are three formats of work with employees performers:
1. Employment contract:
– mandatory written form;
– guarantees, mode of operation must comply with labor legislation;
– the resident of Diia City withholds 5% personal income tax for each employee (if the employee’s annual income exceeds 240 thousand euros, the employee pays and declares the excess at the rate of 18%), 1.5% military duty, 22% SDR from the minimum wage).
2. Gig contract:
– may be concluded in writing or electronic form in compliance with the requirements of the Law of Ukraine “On electronic trust services”;
– social guarantees established by the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine”;
– working hours last no more than 8 hours a day and no more than 40 hours a week, but it is allowed to set a non-standard working day;
– attracting foreigners is possible without obtaining an employment permit;
– based on the concluded gig contract, the certificate for temporary residence of the foreigner in Ukraine can be issued;
– taxation on such terms as in the case of an employment contract.
3. Agreement with a private entrepreneur (on the provision of services/performance of works):
– written or electronic form in compliance with the requirements of the Law of Ukraine “On electronic trust services”;
– legal regulation in accordance with economic and civil legislation;
– social guarantees are not applied;
– a natural person-entrepreneur in the simplified taxation system (group 3) pays 5% of the single tax 22% of the SSC (minimum wage).
Thus, the Law establishes the possibility of choosing a cooperation model: gig contract, employment contract, agreement with the entrepreneur. Each of them has its advantages and disadvantages. The gig contract is a new form of interaction and provides flexible conditions. The employment contract and the agreement with the private individual have been used in Ukraine for a long time, so there is a well-established practice of their regulation.
Since the adoption of the Law of Ukraine, “On Stimulating the Development of the Digital Economy in Ukraine,” the conditions of activity of IT companies have changed dramatically. We hope that the operation of the legal regime of Diia City will be successful. To do this, you should pay attention to business structuring, proper design of cooperation with IT professionals, current reporting, and auditing.
The material was prepared for Yuridichna Gazeta
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Serhiy Barbashin, lawyer, managing partner of Trustme Law Firm
Irina Siroid, lawyer of Trustme Law Firm