Draft law on the «Diia City», а special regime for IT companies in Ukraine, was adopted in the first reading
Tax & Regulatory Alert
On 15 April 2021, the Ukrainian Parliament adopted in the first reading a draft law “On the Stimulation of Digital Economy Development in Ukraine”, No. 4303 dated 02 November 2020 (hereinafter, “Draft Law 4303”). In addition to the mentioned act, on 14 April 2021, the Ukrainian Parliament also registered the accompanying draft law “On Amendments to the Tax Code of Ukraine regarding the Stimulation of Digital Economy Development in Ukraine”, No. 5376 (hereinafter, “Draft Law 5376”).
Draft Law on Diia City Regime
Draft Law 4303 introduces a special legal regime for IT industry in Ukraine (Diia City regime) aimed at creating favorable conditions for running innovative businesses, raising investments, building digital infrastructure and attracting talented IT professionals in Ukraine.
Draft Law 4303 is currently being prepared for the second reading. If adopted, it will come into effect on the day following the day of its promulgation, except for certain provisions which are expected to enter into force three and six months after the entry into force of the draft law.
Notwithstanding many issues left in abeyance, Draft Law No. 4303 addresses the following regulatory matter:
- New Diia City special regime will be valid for at least 15 years.
- Main principles: freedom of activities, as well as freedom to choose the forms of cooperation with third parties and individuals – entrepreneurs; non-interference of the state with the activities of the Diia City residents; presumption of the legality of the residents’ actions; of the procedure for obtaining the status of a Diia City resident.
Main criteria for joining the Diia City regime:
- Performance of special types of economic activities prescribed by the law (predominantly creative/R&D/IT activities);
- 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 is not 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;
- Average monthly remuneration must reach at least EUR 1,200 per month at the latest from the first day of the seventh month following the calendar month in which the status of a Diia City resident was obtained.
The draft law contains a list of constraints prohibiting residence in the Diia City (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.
The draft law provides for establishing the Diia City Residents Register and a Self-regulating organization (SRO) of the Diia City residents; however, participation in SRO will not be mandatory.
Main regulatory innovations:
- New form of cooperation with human capital: introduction of a “gig contract” - 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 forbidden. Provisions on additional benefits and guarantees for gig-specialists, their remuneration, IP rights for works created by gig-specialists under a gig-contract.
- Possibility to regulate agreements with negative obligations, e.g. on "non-disclosure", "non-solicitation", "non-competition" (some of the provisions to be revised for the second reading of the draft).
Draft Law on Taxation of Diia City Residents
Draft Law 5376 introduces a special taxation regime for the Diia City residents, their employees and investors.
Corporate Income Tax (CIT)
Diia City residents may choose one of two options for CIT reporting:
- Stick with the general tax regime and pay Corporate Income Tax at a standard rate of 18% based on adjusted profits, or
- Switch to the new regime and not pay corporate income tax from the profits, but apply CIT at a rate of 9% to the dividends distributed to non-payers of CIT, and certain other transactions.
In case of switch to the special taxation regime, the tax base of the Diia City residents would also include the following payments to non-payers of CIT (i.e. non-residents, individuals, non-profit organizations, etc.):
- redemption of shares;
- interest, commissions, other fees, reimbursements, fines, etc., if the debt-to-equity ratio exceeds 3.5;
- financial aid that is permanently non-refundable / remains non-refundable for more than a year;
- royalties exceeding the amount of royalty income, increased by 4% of net sales income for the previous year, full amount of royalty in favor of non- residents from low-tax jurisdictions (with exceptions);
- investments in assets outside of Ukraine (legal entities, shares, property, etc.);
- payments for goods and services from taxpayers on the simplified taxation system exceeding 50% (since 01/01/2024) or 20% (since 01/01/2025) of expenses from any activity for the previous period, etc.;
- other adjustments.
If a Diia City resident is engaged in controlled transactions, TP adjustments to such transactions are taxed at a standard rate of 18%.
The tax reporting period for special tax regime is a calendar year.
Payroll taxes on employees and gig-specialists
Draft Law 5376 provides for a decreased 5% personal income tax on:
- salary of employees of the Diia City residents,
- remuneration of gig-specialists, and
- author’s remuneration for the work under service agreements (official works) and the transfer of rights to such works.
Draft Law 5376 also provides for the accrual of a 22% unified social contribution (USC) on:
- salary of employees of the Diia City residents in the amount of minimum insurance contribution;
- remuneration for the performance of work under gig-contracts at the rate of 22% of the determined amount of the USC base (limited to the maximum USC-base but not less than minimum insurance contribution).
Draft Law 5376 does not provide for any exemptions or incentives in terms of military duty.
Tax incentives for investors
The following profits are not subject to personal income tax:
- dividends received from the companies registered as Diia City residents (provided that such companies did not pay dividends for two subsequent years);
- capital gains from disposal of shares or other equity rights issued/granted by the Diia City residents (provided that a person held such shares or corporate rights for more than a year).
Entry into force
If adopted, Draft Law 5376 will enter into force on 1 January 2022, except for certain provisions which will enter into force on 1 January 2024.
Published just recently, Draft Law 5376 contains certain inconsistencies and may be subject to further amendments. Since many of the draft law provisions are still under discussion and review of industry and professional associations, the final version of the law, when and if adopted, may contain changes.
Should the 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 purposes 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.