IT industry in Ukraine
for CEE Legal Matters Magazine

Ukraine has been one of the leading providers of software development and IT outsourcing services in Central and Eastern Europe for the last several years.

Despite the general recession in the Ukrainian economy and a sharp decline in other indus-tries, the IT industry continues to demonstrate steady growth. If the legislative changes to deregulate the industry and create a more favorable tax regime are adopted, IT stands a chance of becoming the most promising industry in Ukraine.

Current Industry Support Program

On April 8, 2015, the Ukrainian Government adopted a long-awaited 2015 action plan to support the country’s IT industry. Among other things, the action plan provides for the development of bills to: (1) include definitions of “software,” “supply of software,” and “online service” in the Tax Code of Ukraine; (2) simplify the regulatory procedures for provision of IT services to non-residents; and (3) improve the provisions for allocation of intellectual property rights in computer programs and data bases created by Ukrainian employees and contractors.

It is important for the Ukrainian IT industry that these and other legislative changes are adopted.

Amending the Tax Code for VAT Exemption purposes

Back in 2012, the Parliament of Ukraine adopted some important tax incentives for the IT industry. Such incentives included: (1) a reduction of the corporate profit tax rate from 21% to 5% for IT companies that meet eligibility criteria and have registered with the tax authorities under a special procedure; and (2) the exemption of software supply from Ukrainian VAT.

The first incentive was abolished as of January 1, 2015 (though IT market players continue to lobby for its renewal), but the latter remains valid until January 1, 2023. The major issue with the VAT exemption is that the tax authorities and tax payers sometimes have different understandings of what qualifies as “software” and as “supply of software.” The Tax Code of Ukraine is not totally clear about these matters, and the clarifications issued by the tax authorities have been of little help. It is expected that the changes to the Tax Code of Ukraine (i.e., to define the relevant terms in the code) will set the record straight.

Simplifying the Provision of IT Services to Non-Residents

Until recently, in order to be able to receive payments for IT services provided to foreign clients, a Ukrainian IT freelancer needed to present its servicing bank with a service agreement with the foreign client and a document signed by the client and the freelancer confirming that the services have been provided. This requirement was burdensome and impeded the provision of IT services, in particular those provided via the Internet.

On July 7, 2015, the National Bank of Ukraine clarified that an offer made by a Ukrainian freelancer together with an invoice (payment under which is an acceptance of such offer) would be sufficient for the banks to transfer funds.

Allocating Economic Intellectual Property Rights

Currently, if an employment agreement with a Ukrainian IT developer (or a service agreement with a Ukrainian independent contractor) does not clearly provide for an assignment of the intellectual property rights in a computer program or a database created under the agreement, there may be an issue with determining the owner of such rights. This is due to discrepancies in the Ukrainian intellectual property laws. The Civil Code of Ukraine provides that the economic intellectual property rights jointly belong to both parties, while the Copyright and Related Rights Law provides that they belong to the employer only.

It is expected that the laws will be amended to provide for the automatic transfer of economic intellectual property rights to employers or customers, unless otherwise agreed with employees or independent contractors. Such legislative change will be in line with provisions of the EU-Ukraine Association Agreement signed in March 2014.

Resolving the Key Issue of the IT Industry

We expect that these legislative changes will have a positive impact on the Ukrainian IT industry – but they will not resolve the key issue facing the industry.

Due to rather high payroll tax rates, the majority of IT companies operating in Ukraine are hiring individual IT developers not as employees but as independent contractors. This is because the tax treatment of the independent contractor structure is financially much more favorable for both the companies and the independent contractors and makes the Ukrainian IT industry more competitive worldwide. At the same time, this structure gives rise to the risk that the Ukrainian authorities may reclassify these relations as employment relations, and therefore impose large fines and demand payment of additional taxes and social contributions.

This issue may only be resolved if payroll tax rates are decreased to a level where the independent contractor structure does not offer any material benefits for IT market players.

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