Ukrainian Parliament adopted in the second reading a draft law “On the Stimulation of Digital Economy Development in Ukraine”, No. 4303 

Tax and Regulatory Alert

On 15 July 2021, the Ukrainian Parliament adopted in the second reading and in general the basic draft law “On the Stimulation of Digital Economy Development in Ukraine”, No. 4303 dated 02 November 2020 (hereinafter, “Draft Law 4303”), aimed at launching a special regime "Diia City", which provides for a number of measures to stimulate the development of IT industry.

Draft Law 4303 (Diia City Regime)

Draft Law 4303 introduces a special legal regime "Diia City" for the IT industry in Ukraine, aimed at creating favorable conditions for conducting innovative business, attracting investment, building digital infrastructure and attracting talented IT professionals to Ukraine. 

Main criteria for joining the Diia City regime:
  • Performance of special types of economic activities prescribed by the law. Draft Law 4303 provides an exclusive list of eleven areas of economic activity.
  • Net income from special activities amounts to at least 90% of the total income.
  • Additional criteria for the existing companies:
    • average monthly remuneration for employees/gig specialists should not be less than EUR 1,200;
    • availability of at least 9 employees/gig specialists at the end of each calendar month.
  • Additional criteria for newly established companies/start-ups:
    • the amount of income should not exceed the maximum amount of income set for business entities of the third group of single tax payers.

The draft law contains a list of constraints prohibiting residence in the Diia City (applicable to non-residents, non-for-profit organizations or entities that violate the AML regulations, etc.). Compliance with the criteria is subject to annual verification and auditor’s confirmation.

Key differences between the draft law wordings considered at the first and at the second readings:
  • Extension of the Diia City regime validity: 15 years vs. 25 years.
  • Increased number of permitted economic activities: 9 vs. 11. The following types of economic activity have been added to the final list:
    • activities aimed at ensuring the cybersecurity of information and communication systems;
    • activities that involve the design, research, testing of devices and systems of robotics.
  • Prolongation of the transition period for newly established companies and startups from six months to one year as regards the minimum average monthly remuneration of an employee/gig-employee.
  • Possibility to initiate administrative appeal against the authority's decisions.
  • Exclusion of the provision on non-solicitation and inclusion of separate provisions on non-competition of specialists with employers.
Main regulatory innovations:
  • New form of cooperation with human capital: introduction of a “gig contract” that formalizes legal relations under a civil law contract between an individual - gig-specialist and a company (Diia City resident). However, other forms, including private entrepreneur model, are not prohibited. Provisions on additional benefits and guarantees for gig-specialists, their remuneration, IP rights to works created by gig-specialists under a gig-contract.
  • Possibility to regulate agreements with negative obligations, e.g. "non-disclosure", "non-compete" obligations.

In addition, the Ukrainian Parliament is considering a draft law No. 5376 on amendments to the Tax Code of Ukraine aimed at stimulating the development of digital economy in Ukraine, which sets out tax treatment for the Diia City regime.

Should the tax legislation be adopted, it may significantly change the landscape and business models of Ukrainian IT businesses and R&D centers for multinational companies. Deloitte Ukraine is actively monitoring the changes to the draft laws and engages in discussions for the purpose of implementing the best practices and standards in terms of the Diia City regime taxation.

Should you have any questions regarding this Alert, please contact the experts of our Tax and Legal Department.

Did you find this useful?