TAX REGIME FOR DIIA CITY RESIDENTS — THE NEED-TO-KNOW FACTS

TAX REGIME FOR DIIA CITY RESIDENTS — THE NEED-TO-KNOW FACTS

Ukraine continues to actively create favorable conditions for the development of its IT sector, for which the State is taking further steps. The Law No 1667-IX On Stimulation of the Development of the Digital Economy in Ukraine was adopted on 15 July 2021. The Law outlines the legal regime for the operation of the so-called Diia City residents.

Thereafter, on 14 December 2021, there was adopted the Law of Ukraine No 1946-IX On amendments to the Tax Code of Ukraine to stimulate the development of the digital economy in Ukraine, introducing changes to the Tax Code of Ukraine (TCU). It came into force on 1 January 2022.

Pursuant to these amendments, the State allows the Diia City residents to switch to a special tax regime. It means that the taxpayer can choose: either to pay the corporate profit tax (CPT) at the rate of 18% on general terms or to opt special tax conditions and pay the CPT at the rate of 9 % on certain transactions of the IT company, for example, dividend payments, provision of financial assistance to Diia City non-residents, payment of royalties, etc.

Conditions to acquire special status include:

  1. The company is involved in IT activities (programming, software development, etc.).

  2. Monthly payments to employees are not less than EUR 1200 per month (based on the official exchange rate).

  3. Average number of employees/gig-specialists is not less than nine persons.

  4. The income from IT activities is at least 90% of the total company’s income.

  5. No circumstances specifically listed in the law are applied (non-transparent ownership, tax debt, sanctions, etc.).


Companies-residents of Diia City will have to provide special reports confirming their compliance with the above criteria to be affirmed by an auditor three months after this special status is acquired by the company and then on an annual basis.

A newly registered entity may also apply for this special regime, but will have to confirm that it corresponds to the above criteria at the end of the calendar year following the one when it is registered as a Diia City resident.

Special provisions applied to companies-residents of Diia City

Employment

Specialists can be engaged on the basis of so-called “gig-contracts” (a type of civil-law contract). Gig-contract provides for some social benefits (17 working days of paid vacation leave, sick leave, fixed working hours); nevertheless, it cannot be classified as an employmentcontract and the employment law provisions do not apply (e.g. the contract can be terminated by either party by a thirty - day notice).

Accordingly, the risks of ‘hidden’ employment previously associated with contracting IT-specialists - sole entrepreneurs are mitigated by concluding such contracts.

Taxation

Payroll:

  • Personal Income Tax (PIT) of 5% withheld from remuneration fee/salary up to EUR 240k per year (18% withheld from remuneration fee/salary exceeding EUR 240k per year).

  • Military tax of 1.5% (withheld from remuneration fee/salary).

  • Social contribution of 22% of minimum salary paid by the employer at its expense.

 

Corporate Taxation - Alternative Options
  1. General: Corporate Profit Tax – 18% on financial result (with certain tax adjustments as provided by the TCU).

  2. Alternative option:

    • 9% of CPT on certain taxable transactions (repayment of investment, investment abroad, payment of interest, royalties, donation and employment benefits in case they are not taxed by PIT and, in some cases, payment for goods and services).

    • Payment to contractors – payers of 5% single tax that exceeds 50% of the company’s total expenses in the year 2024 and 20% starting from 2025 will be deemed as taxable transactions and be subject to 9% of tax.

    • In case controlled transactions are carried out, the tax of 18 per cent shall be applied, unless the arm’s length principle is used.

The State guarantees that special tax conditions for Diia City residents will remain stable for at least 25 years. Ukrainian IT companies will soon experience the legal and tax benefits in the tech sector. Moore team is delighted to assist both IT players and startups with applying for the Diia City resident status, meeting the related requirements and choosing the most palatable taxation model. And we are ready to provide you with ad hoc advice on tax and legal matters to do more for effective running of your business. As experienced advisers to the legal sector, we focus on helping our clients take advantage of opportunities and stay one step ahead in this changing world.