Tax Incentives for IT Companies in the Diia City Tax Law

The Ukrainian Parliament makes the two steps to facilitate the growth of innovative businesses and attract foreign investments - Diia City Framework Law and Diia City Tax Law.

The first law [1] introduces the legal regime for innovative companies called "Diia City" (reads in Ukrainian as “Action City”). The State guarantees its validity, terms, and conditions for the next 25 years.

The second law [2] will set tax incentives for IT companies and their employees registered with Diia City (the “DC Residents”) - IT outsourcing, software development, gaming, robotics, cybersecurity, digital marketing, and other businesses. Both established businesses and startups (up to 24 months after incorporation) may become DC Residents. Wherein, startups are subject to lower requirements.

[1] On 14 August 2021 the Law № 1667-IX  “On Stimulation of the Development of the Digital Economy in Ukraine” (“Diia City Framework Law”) came into force

[2] On 2 June 2021 Verkhovna Rada of Ukraine adopted the Draft Law № 5376 “On Amendments to the Tax Code of Ukraine regarding Stimulation of Development of Digital Economy in Ukraine” in the first reading (“Diia City Tax Law”)

Corporate Tax Incentives for Diia City Residents

According to the new legislation, DC Residents may opt for a special "DC Tax Regime" and pay corporate profit tax, also called CPT, only on the Distributions (distributed profits like payments of dividends, interest, or royalties, payments to non-profit organizations, an extension of zero-interest loans, etc).

The Distributions are subject to 9% CPT in Ukraine at the DC Resident level. In case the Distributions are made to non-residents such amounts may also be subject to Ukrainian withholding tax at a general rate of 15% unless a reduced rate or exemption is available under the applicable Ukrainian double tax treaty (Ukraine has 74 double tax treaties in force).

At the same time, DC Resident may opt for a general taxation regime and be subject to an 18% CPT on profit determined according to its accounting financial result as adjusted under the Tax Code of Ukraine.

 

Employment Features

The requirement to qualify for the DC Tax Regime - the DC Resident shall employ at least 9 specialists ("DC Employees") either under ‘gig-contract’ or by the Labor Code.

‘Gig-contract’ is a new concept introduced by Diia City Framework Law. Unlike the well-known service agreements, this contract also ensures basic social protection to the contractor - paid vacation, sick leave, maternity/paternity leave, etc.

DC Employees shall have a gross monthly salary of EUR 1200 at a minimum (jointly the “Employment Requirements”). The Employment Requirements do not apply to startups within a “grace period” of up to 24 months after the incorporation of DC Resident. The monthly salary of DC Employees will be subject to a 6,5% effective tax rate.

As an employer, DC Resident shall also pay a unified social contribution (“USC”) at a 22% rate on salaries, but still within the minimum and maximum brackets per employee (brackets are linked to the actual rate of the minimum salary in Ukraine, which is changing):

• minimum – UAH 1,320 (ca. EUR 50)
• EUR 1200 monthly salary – ca. UAH 7,930 (EUR 264)
• maximum – UAH 19,800 (ca. EUR 661)

 

Subject to fulfillment of Employment Requirements, besides DC Employees, other DC Resident specialists may be contracted under the service agreements with individual entrepreneurs registered in Ukraine. The income of individual entrepreneurs will be subject to a 5% effective tax rate, and individual entrepreneurs may opt to pay USC at a minimum threshold level irrespective of income amount.

It is worth mentioning that the DC Tax Regime sets out a safety measure against tax abuse of employment structure with individual entrepreneurs. Wherein, starting from 2024 DC Resident’s expenses for individual entrepreneurs exceeding 50% of all expenses for the previous tax year are deemed CPT taxable Distributions; and in 2025 the above threshold is reduced to 20%.

 

Diia City Timescale

Once Diia City Tax Law comes into force, Diia City stakeholders will be able to benefit from the DC Tax Regime. Herewith, Diia City Tax Law is yet to pass the second reading in the parliament and to be signed by the President of Ukraine.

Meanwhile, the draft of Diia City Tax Law provides that it shall generally enter into force on 1 January 2022, except for certain provisions entering into force on 1 January 2024.

The Ukrainian IT sector is rapidly growing and is full of highly qualified professionals comparable to the EU market level. Meanwhile, the product development cost in Ukraine is much lower than in the EU and the USA. These major reasons stimulate a rising trend for the establishment of IT back-offices of large worldwide IT players in Ukraine.

The introduction of the Diia City framework is another impulse for strengthening this trend.

In this respect, being a full-service law firm with a head office in Kyiv, INTEGRITES is delighted to assist with any questions related to opportunities of Diia City, including:

• meeting the Diia City requirements
• specific benefits and opportunities of Diia City available to business
• applying for the Diia City regime, and more