KYIV - December 15, 2021. On August 14, 2021, the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” (Law on Diia City) came into force, introducing a new legal regime Diia City for the IT industry in Ukraine. The Ministry of Finance, the project's stakeholder, believes that it will “create the most powerful IT hub in Ukraine in Central and Eastern Europe, with no boundaries for investment, job creation or the development of new technologies. Ukrainians and entrepreneurs from all over the world will have the opportunity to quickly develop the most ambitious innovative and business ideas and implement them effectively.”
This is a capstone law, which defines the status and requirements for Diia City members (residents, specialists, gig-specialists), the procedure for acquiring and losing the status, reporting of residents, features of regulation of transactions involving Diia City residents, including the NDA and NCA, features of regulation of corporate governance of residents of Diia City.
The Ministry of Digital Transformation plans to launch the Diia City regime in early 2022, following the adoption of the necessary bylaws by the Cabinet of Ministers of Ukraine and will be implemented for at least 25 years.
On December 14, 2021, the Verkhovna Rada of Ukraine adopted in the second reading the draft law No5376 “On Amendments to the Tax Code of Ukraine to Stimulate the Digital Economy in Ukraine”, which regulates the tax part of Diia City, establishes tax rules for the residents of Diia City, investors and specialists (employees and gig specialists), primary entering into force on January 1, 2022.
Yulia Fedosyuk, a member of the Board of the UBA Committee on Tax and Customs Law, a tax expert, and a lawyer shares her thoughts about the main advantages of the Law, its key provisions, and its importance.
So what are the key rates and rules?
18% - tax rate for residents who have chosen to pay income tax on general grounds; 9% - the tax rate for residents who have chosen the corporate income tax on special terms.
Income tax on special conditions is, in fact, the tax on distributed profits, which is designed to conduct the taxation of certain transactions for the distribution of profits and equivalent payments (transactions to withdraw funds from the company). Such transactions include, in particular, payment of dividends, return of the deposit in connection with the withdrawal of the shareholder, repayment of interest, commissions, fines on loan agreements, royalties, gratuitous supplies, financial assistance unpaid within 12 months, investment in facilities outside the territory of Ukraine, several settlements with non-residents and other payments.
Residents can choose the income tax regime and make the transition to taxation as a resident of Diia City, a taxpayer on special conditions, once a calendar year.
Taxation of dividends accrued by a resident of Diia City - a taxpayer on special terms
The law stipulates that if a Diia City resident fails to pay accrued dividends on shares or other corporate rights for 2 consecutive calendar years, such dividends shall not be included in the calculation of the total monthly (annual) taxable income of an individual taxpayer.
PIT and SSC from the income of specialists of a resident of Diia City
5% - PIT from the following income of the taxpayer - Diya City resident (employee or gig specialist):
- wages (all employees of a Diia City resident);
- remuneration under the gig contract;
- royalties for the creation of an official work and the transfer of rights to official works.
There is a limit on the amount of income to which such PIT rate applies, namely 240 thousand euros per calendar year at the official exchange rate of hryvnia against the euro, set by the National Bank of Ukraine as of January 1 of the reporting tax year.
If the amount of income received for the year exceeds 240 thousand euros, the rate of 18% is applied to the amount of such excess, and the obligation to declare and pay tax on the excess is vested in the individual who receives income.
SSC is set in the amount of the minimum insurance premium for wages (basic and additional wages, other incentive and compensation payments) and the amount of remuneration to gig specialists under gig contracts.
The law grants individuals with the right to include in the expenses subject to the tax deduction the amount of expenses for the purchase of shares (other corporate rights) of the Diia City resident, provided that such expenses were incurred before the issuer acquires Diia City resident status or during the period when such resident met the requirement established by item 3, part 3 Article 5 of the Law on Diia City (investment in startups).
Cooperation of Diia City residents with private entrepreneurs - single taxpayers
Rules on taxation of transactions between Diia City residents and private entrepreneurs - single taxpayers enter into force from January 1, 2024 for Diia City residents taxpayers of income on general grounds with an annual income exceeding UAH 40 million, and residents of Diia City who have chosen a special tax regime.
In 2024, the rules on taxation of such transactions will work provided that the amount of acquisition of property, works, services (except royalties) from the single taxpayer during the tax (reporting) year is calculated in excess of 50% of the cost of any activity (expenses related to operating, financial and investment activities), determined according to the indicators of the Statement of financial performance (Statement of comprehensive income) for the previous annual reporting period.
From January 1, 2025, the rules on taxation will work if the payments of such private individuals exceed 20% of the cost of any activity.
Tax on the sale of investment assets
The provision that was included in the draft law for the first reading on the tax exemption of income received by an individual from the sale of investment assets, namely the alienation of shares (other corporate rights) issued by a Diia City resident, provided such shares (other corporate rights) have been the property of the taxpayer for more than one year, did not find support among the deputies and was not included in the draft law for the second reading. Taxation of such income will be carried out according to the general rules of the Tax Code.
In conclusion, we can say that the tax regime established in Diia City is an opportunity to create a kind of IT haven in Ukraine with attractive taxes for the industry. The success of the project depends on many factors, but above all - on providing the state with transparent and clear rules for businesses to administer and regulate this regime and the willingness of industry to accept such rules and trust the state under the existing law enforcement and judicial system.
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