On February 8, 2022, at the Diia Summit, Volodymyr Zelenskyi, President of Ukraine, announced the launch of Diia City — a special legal framework for IT companies. The Ministry of Digital Transformation started the registration today. AIN.UA would like to tell you about Diia City and how a Ukrainian IT company can become its resident.
How Diia City works
Describing it in a nutshell, Diia City is a special legal framework for the Ukrainian IT industry started in 2022. Participation is voluntary. Any Ukrainian company that meets requirements can get residency in Diia City. All residents will have specific benefits and a new form of cooperation with employees — gig contracts. There are also implemented several terms from British law that will be useful for companies getting foreign investments — option contracts, convertible loans, etc.
The residents must also fulfill certain restrictions and obligations (for example, volume limits for the work with individual entrepreneurs and obligatory audit). This special legal mode is described in two Laws:
- Digital Economy Support Law no. 1667-IX. It describes what Diia City is and how it works.
- About amendments to the Tax Code of Ukraine and other Laws of Ukraine regarding the Digital Economy Support no. 1946-ІХ. In general, it defines tax rates and work conditions for residents.
- There is also a Resolution of the Minister Cabinet of Ukraine prescribing application rules in Diia City.
We did many publications about Diia City. Let’s make a brief reminder.
- The new residents can choose what corporate tax to pay: 9% exit capital tax (ECT) or 18% income tax.
- What is the ECT? Maksym Nosarev, IT lawyer and founder of Tretten Lawyers, provides an example: A company made $100,000. Current corporate income tax means an immediate payment of 18% of the whole sum. If the company works with the exit capital tax, a part of income spent on variable costs and the development is not to tax.
- The income of individuals in the form of dividends from a resident company will be tax-free if paid not more than once in two years. There will also be a tax discount for individuals if they purchase a share of a startup that is the Diia City resident.
- Income of employees and gig specialists of Diia City residents will be taxed as follows: personal income tax – 5%, Social Security fee – 22% of the minimum wage, military tax – 1.5% (of an employee’s salary or a gig employee remuneration). If a professional receives more than 240,000 euros per year, all income above this limit will be taxed at 18% PIT.
- For some residents, there are volume limits in working with individual entrepreneurs (FOPs). We have already posted an article about them.
Some Ukrainian IT companies are already talking about their Diia City residency, for example, SoftServe and MacPaw.
How to apply for Diia City residency?
During the Diia Summit, the Ministry of Digital Transformation declared that after February 8, 2022, IT companies could apply for residence under those special terms. There is also a new register of Diia City residents.
To apply for special taxation mode, you need to:
- go to the official website of Diia City
- pass verification with your digital signature
- fill out an application
The application and attached documents must be in Ukrainian and signed with a qualified electronic signature (QES). A company may initially choose the new taxation mode (to pay the ECT instead of the income tax).
Fill out the following fields:
- Full name and ID of the company
- Contacts: email address and contact phone number
- Mark if it is a startup
- Mark that there are no obstacles forbidding the residency in Diia City
- Mark that your company meets requirements for the residency in Diia City
- Mark if the company switches to the exit capital tax (if yes, fill out a small information that will be sent to the State Fiscal Service)
- If it’s a startup, enter the income for the last year — it must not exceed 7 million UAH
- Choose a qualified activity that the company will do
- Fill out the field about company representatives
The Ministry of Digital Transformation will proceed with your application within ten working days. If the company meets the standards, it will be registered in the register of Diia City residents. Now you are a member of this unique legal and taxation project. The register is available on the Diia City website.
The registration works as a “silent agreement.” If you won’t receive a refusal or any feedback after 10 working days, it means that your company is a “citizen” of Diia City now.
Frequently Asked Questions about Diia City.
What are the requirements to become a resident?
For existing IT companies:
- providing activities mentioned in the legislation about Diia City (more details here or on its official website)
- 90% of revenue comes from the activities mentioned above;
- average monthly salary of employees or bonus of gig workers is at least 1,200 EUR (excluding individual entrepreneurs)
- +9 employees and/or gig workers (excluding individual entrepreneurs)
For startups:
- providing activities mentioned in the legislation about Diia City
- 90% of revenue comes from the activities mentioned above
- business registration within 24 months before applying here
- annual income doesn’t exceed 7.5 million UAH
For brand-new companies or startups:
- providing activities mentioned in the legislation about Diia City;
- 90% of revenue comes from the activities mentioned above;
- business registration within 24 months before applying here;
- annual income doesn’t exceed 7.5 mln UAH.
How will they check a company?
The requirements above will be checked based on the compliance reports submitted by residents and the mandatory independent auditor’s conclusions. In the case of the first report of a brand-new company, this requirement is not applied.
If the company violates those criteria, it will lose its residency.
Can a foreign company become a resident?
It can if it registers a legal entity in Ukraine.
How can a company leave Diia City?
- If a company ceases to meet the requirements described above, it must notify the Ministry of Digital Transformation, and it will be removed from the register.
- A company can also quit at its own will. For this, it must submit an application to the Ministry.
How to choose the tax: 18% income tax or 8% exit capital tax?
If the company plans to reinvest, better to choose the ECT. The taxation base here is asset export operations in the form of dividends and related payments. For example, it provides irrevocable financial support and makes deals by giving a counterparty its assets but getting nothing in return.
Do I need to submit information to the State Fiscal Service if my company becomes the resident?
- If your resident company stays with the income tax, there is no need to inform the SFS.
- If your company switches to the ECT, you must notify the SFS.
The rules for residents working with individual entrepreneurs
- Companies that pay the 18% income tax, whose annual income does not exceed 40 million UAH, will be able to work with individual entrepreneurs without restrictions during the entire period of the Diia City regime.
- For all other residents, payments to individual entrepreneurs should not exceed 20% of total costs. For those companies that will pay the ECT, amounts above the limit will be subject to this tax at the rate of 9%.
- For companies that pay the income tax, those costs for individual entrepreneurs that exceed 20% will have to be included in the financial result.
- Restrictions on working with individual entrepreneurs will be fully operational only from 2025. Until then, there will be a transition period of three years: until 2024 – no restrictions; in 2024, tax-free payments not exceeding 50% will be allowed.
