On 15 April 2021, the parliament of Ukraine adopted on its first reading a draft law incentivising the development of the digital economy in Ukraine, the so-called Diia City law. The draft encourages innovation, investment into the digital infrastructure and engaging talented specialists.
Some of the key proposed changes relate to arrangements with the Ukrainian developers (who are mostly engaged as private entrepreneurs). Specifically, the draft law creates a special type of services contract called a gig-contract. Alternatively, IT specialists could be employed on the basis of a labour contract, which is a special type of an employment contract in Ukraine. These changes are expected to bring clarity to the matter of how IT professionals are to be engaged and so, would eliminate the risks associated with the use of the private entrepreneur regime for those IT companies which opt for either a gig-contract or a labour contract. Another good news are provisions aimed at increasing enforceability of restrictive covenants such as non-disclosure, non-compete and non-solicitation clauses.
The legal regime for Diia City is to be introduced for not less than 15 years, which is expected to guarantee legal stability for IT companies.
In relation to taxation, a separate law introducing amendments to the Tax Code of Ukraine was registered with the Verkhovna Rada on 14 April 2021 (“Draft No 5376“). As with its predecessors, Draft No 5376 envisages an exit capital tax at 9% instead of the corporate income tax at 18%. The exit capital tax will apply to dividend distributions and certain other transactions, e.g., to amounts paid to individual entrepreneurs who use the simplified tax regime, subject to thresholds of total expenditures that a Diia City resident incurs.
Salaries of specialists (including gig-contractors) employed by Diia City residents will be subject to 5% personal income tax, and the unified social contribution to be paid for each specialist – regardless of the level of their salaries – is established at a minimum level. That is significantly lower than a common payroll tax burden.
Notably, individuals who are shareholders of Diia City residents will also enjoy exemption from personal income tax and military tax on dividends if such dividends are paid once in three years.
As opposed to certain positive developments, the draft has some provisions that might be seen as burdensome by the IT community, e.g., submission of annual audit reports to confirm eligibility for being a Diia City resident, and tax uncertainties if an entity loses its Diia City-resident status.
Please note that these draft laws are subject to further possible amendments in the course of their consideration by the parliament. We will further monitor these and keep you updated.
If you would like to learn more about the subjects covered in this publication, please contact Zoryana Sozanska-Matviychuk, Partner, Head of M&A, and Oleksandr Markov, Counsel, Head of Tax.