President signs Law No. 1946-IX “On Amendments to the Tax Code of Ukraine regarding the Stimulation of Digital Economy Development in Ukraine”

On 20 December 2021, the Ukraine president signed Law No. 1946-IX dated 14 December 2021 (“Law 1946-IX”) that provides a special tax regime for Diia City residents and their employees, gig-contractors and investors.

A majority of the provisions mentioned below will come into effect as from 1 January 2022.

Corporate income tax

• Diia City residents may choose one of two tax regimes:
  • The standard corporate income tax (CIT) rate of 18% on adjusted profits; or
  • A special tax regime with no corporate income tax on adjusted profits, but, rather, a CIT rate of 9% on certain payments.
• Within the special tax regime, the following payments are subject to 9% CIT (except for payments to other Diia City residents subject to the special tax regime and certain other exceptions):
  • Payment of dividends to shareholders;
  • Capital distributions for a participant's withdrawal, liquidation, share buybacks that exceed the amount of the investment;
  • Payment of interest, commissions, other remuneration, compensation, penalties, and fines;
  • Free-of-charge provisions of property, work, services, or their sale without receipt of funds within 365 days (if funds are received in future periods, tax liability may be reduced accordingly);
  • Provisions of financial aid (i.e., interest free loans) that are not refundable or remain not refundable within 12 calendar months (in case of repayment in future periods, the tax liability may be reduced accordingly);
  • Royalty payments exceeding the amount of royalty income increased by 4% of net sales revenue; however, for royalties paid to nonresidents from low-tax jurisdictions and of special legal forms, non-beneficial owners of income, and mutual investment funds, and for intellectual property rights having originated in Ukraine, the full amount of royalty payments;
  • Investments in assets made outside of Ukraine (e.g., legal entities, shares, property);
  • Payments for property, works and services purchased from individual contractors and businesses on the simplified tax system that exceed the threshold based on total expenses for the previous tax period (50% of total expenses for 2024, and 20% of total expenses for 2025 and onward);
  • Contributions to the share capital of a legal entity, a joint venture, or trust management;
  • Cash transfers to the company’s own foreign bank accounts; and
  • Certain other payments and transactions.
• If a Diia City resident is engaged in controlled transactions, transfer pricing adjustments to such transactions will be taxed at the standard CIT rate of 18% (which will not be subject to withholding).
• For each separate taxable transaction, the tax liability of a taxpayer under the special tax regime is reduced by the amount of any withholding tax paid (up to the amount of tax liability).
• Payment of dividends by Diia City residents under the special tax regime will not be subject to advance CIT payments.
• Diia City residents paying the standard CIT rate should adjust their pre-tax financial result by the amount of property, works and services purchased from the individual contractors and businesses on the simplified tax system that exceed the threshold based on the total expenses for the previous tax period (50% of total expenses for 2024, and 20% of total expenses for 2025 and onward).

Payroll taxes

• A lower personal income tax rate of 5% will apply to:
  • The salaries of employees of a Diia City resident,
  • The remuneration of gig-contractors of a Diia City resident, and
  • An author’s (i.e., software developers’) remuneration (including transfers of rights) pursuant to a service agreement with a Diia City resident.
• Where the annual income of an employee or gig-contractor of a Diia City resident exceeds EUR 240,000, it will be subject to the standard personal income tax rate of 18%. This excess amount should be reported, and the relevant tax should be paid directly by the employee or gig-contractor.
• Law 1946-IX does not provide for exemptions or incentives for military contributions.
• The unified social security contribution will be accrued at the rate of 22% on the salary and any other compensation (including fringe benefits) of employees of a Diia City resident and the remuneration of gig-contractors of a Diia City resident, with a minimum insurance contribution of approximately USD 50 per month.
  
  

Tax incentives for Ukrainian resident individual investors

• Dividends received from a company registered as a Diia City resident that is subject to the special tax regime will not be subject to personal income tax (provided that such company did not pay dividends for two years).
• Individuals who have purchased shares (or similar corporate rights) issued by Diia City residents (either Diia City startups or companies established prior to becoming Diia City residents) may deduct the cost of such shares from their personal income tax base. However, the deduction will be limited to the amount of dividend income received from such Diia City residents.

The changes proposed by Law 1946-IX are of vital importance since they will significantly change the landscape and business models of Ukrainian IT businesses and research and development centers for multinational companies. Companies that find these changes relevant to their operations should explore the legislative provisions and consider whether to register as a Diia City resident.

To recap, the Law of Ukraine No. 1667-IX dated 15 July 2021 “On stimulating the development of digital economy in Ukraine” was adopted earlier; it established the main organizational and regulatory principles of the Diia City regime and introduced a number of legal incentives for its residents and measures to foster the development of the entire IT industry.

If you have any questions regarding the information contained in this alert, please do not hesitate to contact our Tax & Legal professionals.

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