Here’s a quick onboarding guide for all those concerned
Diia.City is a brand-new project from the Ukrainian Ministry of Digital Transformation that is supposed to revolutionize the national IT-industry.
According to President Zelensky, this e-governance tool will stimulate the development of the digital economy in Ukraine and increase the industry’s revenue to $16.5 billion. Both Ukrainian and foreign companies have already started to join the project.
The benefits of Diia.City
In September 2020, the Ministry of Digital Transformation of Ukraine presented the project “Diia.City” – a special legal regime with favorable conditions for the development of the Ukrainian IT industry. The regime presupposes tax reduction for the entrepreneurs dealing with digital technologies. In other words, it is a virtual model of a free economic zone with simplified regulations and other benefits.
The project was not approved immediately, requiring additional corrections. However, the “Law on stimulating the development of the digital economy in Ukraine” came into force in August 2021, became the “green light” for Diia.City implementation.
The main changes to the previously existing legislation brought by the new legal regime are updated taxation rules and the new form of project co-operation defined as gig contracts.
Gig contracts help to legalize the relationship between an employee and employer outside of employment contracts. They relate to project work and contain established social guarantees. Previously, freelance IT specialists needed to register as self-employed private entrepreneurs to provide their services to any companies legally.
They used civil contracts to document the terms of providing third-party services. By doing that, they lost some privileges of the hired staff. Now, gig contracts will include the terms of paid vacation, a sick leave related to pregnancy and childbirth, mandatory social insurance, etc.
As for the taxes, the residents of Diia.City can benefit from new special terms:
- The ability to choose which corporate tax to pay. The new proposed withheld capital tax of 9% is paid only when the owner decides to withdraw income from the business, not considering the funds that the company reinvests in the business. Meanwhile, ordinary income tax is 18% and is paid on all profits earned. The authors of the law hope that such a tax reduction will encourage IT companies not to take profits abroad, but to re-invest them in business development in Ukraine.
- Special tax rates for employees: personal income tax (PIT) – 5% (while general PIT rate in the country is 18%), single social contribution tax – 22% of the minimum legal wage instead of the entire actual amount of salary, and military duty – 1.5%. If a specialist earns more than 240 thousand euros per year, all income above this limit will be taxed at 18% of personal income tax.
- Transition period from third-party contract models to gig contracts and employment contracts. From 2024, the costs resident companies pay to single taxpayers should not exceed 50% of project-related expenses, and in 2025 this share should decrease to 20%. The majority of the payouts should be regulated by gig contracts. So far, there are no restrictions as for co-operation mode. Taxation of private entrepreneurs, who will cooperate with Diya.City residents, will remain unchanged.
- Those who have chosen the Diia.City regime but preferred to pay income tax, and whose annual income does not exceed UAH 40 million, will be able to work with private entrepreneurs without restrictions after 2025.
- The law also provides for a zero rate of personal income tax for dividends accrued by the resident company, provided that they are paid no more than once every two years. It also includes a tax rebate on investments in Ukrainian startups.
Who can become a resident?
A legal entity registered on the territory of Ukraine according to the national legislation, regardless of its physical location and place of operations, can become a resident of Diia.City, under the following conditions:
- it is involved in computer programming, consulting on informatization, computer equipment management activities, creating computer games and other software, providing software products, including computer games, online, providing web services for the delivery of software applications, educational and research activities in the field of information technology, data processing, cybersecurity, organizing e-sports competitions, design, research, or testing of technologies, devices and systems related to robotics;
- the company shall pay the average salary of €1200 to employees and gig workers after it becomes a resident;
- it has at least 9 employees or gig-workers;
- the amount of the qualified income (income from IT services) of such legal entity for the three-month period after registration and for every calendar year after that will be equal or exceed 90% of the total income of this legal entity for the same period;
- it is not registered in the territory and / or in accordance with the legislation of a foreign state;
the entity is not a non-profit enterprise, institution or organization;
- it has not violated the requirements of the legislation on disclosure of information about the ultimate beneficial owners and / or submission of information about the ownership structure of the legal entity;
- its direct or indirect stake owners of the authorized (share) capital should not include the aggressor state itself, and legal entities or permanent residents of such a state;
- it is neither bankrupt, nor in the process of termination, except for transformation;
- it shouldn’t have a tax debt totaling more than 10 minimum wages for the last 30 days;
- if it provides services related to the circulation of virtual assets, such a legal entity should comply with the legal requirements as for registration, obtaining a license or other permit;
- it should not be involved in organization of gambling games;
- 25% or more of its authorized capital should not directly or indirectly belong to legal entities registered in the countries not cooperating in combating money laundering as defined by FATF;
- companies that are registered less than 24 months before the application date have the opportunity to apply on a startup basis, if their annual income does not exceed 1167 minimum wages (approximately UAH 7 million). Startups may not meet the criteria for salary and average number of employees until December 31 of the calendar year following the year it became a resident of Diia.City.
How to become a resident of Diia.City?
To become a resident of the Diia.City, the legal entity shall submit an electronic application at the official governmental portal.
- Register or log in (if already registered) on diia.gov.ua and pass the verification with an electronic signature.
- Fill out the application. Fill in the attached documents in Ukrainian and sign them with a qualified electronic signature.
- It takes 10 days to access your application. If the applicant does not receive a reply within this time, the company will automatically be granted the status of Diia.City Resident.
The application includes the following details: legal name of the entity, identification code of the applicant in the Unified State Register, personal details of the company’s executives, information about the income for the last calendar year, information about the services / products the company provides.
After the entity has become a Diia.City resident, should submit another application to become a taxpayer on special conditions to the State Tax Service of Ukraine. Otherwise, general taxation rules will apply.