The IT industry development is gaining momentum. Statistics show that the number of IT specialists has been increasing rapidly in recent years. Moreover, Ukraine is at the leading position in Central and Eastern Europe, as it ranks second in terms of the number of specialists. The demand for IT professionals continues to grow, so the government is interested in creating decent conditions for the development of this sector.
What does Diia.City mean for IT?
One way to attract foreign investors and national companies was the introduction of the legal regime Diia.City. On August 14, 2021, the Law of Ukraine, “On Stimulation of Digital Economy Development in Ukraine,” which regulates the provisions of the proposed regime, came into force.
Besides, in order to fulfill the promised tax obligations, the draft law “On Stimulating the Development of Digital Economy in Ukraine” was passed in the first reading. The carried-out legislative work shows a comprehensive approach and the development of all the necessary legal provisions for the full launch of Diia.City. Therefore, let’s analyze the proposed regime in more detail.
An IT company registered under Ukrainian law, which wishes to obtain the status of a resident of Diia.City, must meet the following requirements:
- carry out activities provided for in the Law (mainly related to computer programming);
- hire at least 9 full-time employees or gig-specialists and pay them remuneration in an amount not less than 1,200 EURO;
- the amount of qualifying income of the company must be at least 90% of the total income for the period prescribed by law;
- also, there must be no negative circumstances provided for by law for a Diia.City resident (e.g., non-profit organizations, bankrupt companies, legal entities in the state of termination (except for transformation), companies under sanctions, etc.).
Exceptions to Diia’s rules
Of course, there are exceptions to the above rules. So, in particular, if a legal entity does not meet all the requirements, it can still obtain the status of a resident, but for a limited period (no more than 2 years) and under certain conditions:
- First, for the so-called “transition period,” the norms on the number of employees and their salaries do not apply.
- Secondly, the “age” of the company registered in Ukraine shall not exceed two years, and its annual income shall not exceed 1167 minimum wages (as of 2021 – about 7 million UAH). These provisions are aimed at attracting new IT business players – startups, which with the help of simplified conditions, will have time to develop their idea and grow to the level of a full-fledged Diia.City resident.
GIG specialist, GIG contract
The law defines them as individuals who are contractors or performers based on a gig contract as a type of civil-law contract. Thus, the legislator is trying to create a kind of symbiosis between labor and civil relations, connecting the working conditions of “freelancers” with social guarantees without creating excessive tax obligations.
An important prescription of the law is the variability of workers’ employment forms because it can be done under a gig contract and under the standard scheme of the Labor Code of Ukraine or by concluding an agreement with the FOP. The resident has the right to choose the most convenient way for them, but one should not forget about the requirement of 9 employees (and FOP is not included).
What does the new bill offer?
Let’s consider the conditions proposed by the draft law “On Amendments to the Tax Code of Ukraine to stimulate the development of the digital economy in Ukraine.” In particular, it establishes that:
- Diia.City residents can choose corporate tax, namely 18% income tax or capital withdrawal tax (there is no specific definition in the bill, but its legal nature follows from the tax base) 9%.
- A company listed in the Diia.City register and which is a taxpayer on general grounds, may decide to switch to tax as a resident of Diia.City. The procedure is effortless: submit an application to the regulatory authorities no later than 15 days before the next calendar quarter. If such an application has not been filed, it is summarized that the resident opted for 18% corporate tax. Thus, the above taxes are equivalent in fulfilling the duties as a Diia.City resident taxpayer and may substitute for each other.
- There have been no significant changes in labor taxes. Full-time employees are taxed as usual, while FOPs have added a 1.5% military tax levy (gig employee taxation is the same as in FOPs).
What are the pitfalls that Diia.City foresees?
The main idea behind the new regime is to change the business model of working with FOP. On the one hand, this is a big benefit for improving the legal culture in labor relations, but on the other hand, the conditions for entering and obtaining residency status are almost unrealistic for small businesses. In addition, the proposed tax regime, as opposed to the general scheme of cooperation with the FOP, is questionable in terms of tax savings.
Since the bill establishes a tax deduction (according to personal income tax) for investment in Ukrainian startups, respectively, Diia.City will be an attractive proposition for IT companies with foreign capital, which make payments to foreign investors. Many doubts arise from the proposed design of the NCA contract, which provides for a refusal to perform competitive actions.
Of course, the legislator borrowed it from other jurisdictions, where they have long begun to depart from the conclusion of such agreements or even prohibit them altogether. Even though such agreements are voluntary, the very idea of paying for refusal to work violates the Constitution of Ukraine in terms of the right to work and entrepreneurial activity.
In general, many provisions of the legal regime raise doubts and concerns among representatives of the IT industry.
Some are worried that small and medium-sized businesses will be swallowed up by unicorn companies – residents of Diia.City, others foresee excessive supervision of regulatory bodies in the case of FOP, not gig specialists.
In general, such doubts are justified, so the company Finevolution offers to prepare in advance, in particular by means of professional legal protection.