A year ago, the Law “On Stimulating the Development of the Digital Economy in Ukraine” (Law on Diya.City) entered into force in Ukraine, introducing a new legal regime for the IT industry in our country. The Diya.City concept from the developers means low taxes, an opportunity to build a transparent corporate structure and attract investment more easily.
Let’s remember how everything was
The official launch of Diia City took place on February 8, 2022 as part of the Diia Summit, and at the same time, the acceptance of applications for special regime resident status began.
According to Diya’s report, already on February 16, 2022, such giants as Reface, Roosh, Monobank, MacPaw, Ajax Systems, Revolut, EPAM Systems, Samsung, Genesis, NiX Solution, Softserve, Sigma.Software, RIA.com became residents of Diya.City . Rozetka, Plarium, Deus Robots and many other well-known technology companies.
As is well known, tax rates are among the main advantages of Diya.City. From January 1, 2022, amendments to the Tax Code regarding taxation of companies of Diya.City residents and Diya.City specialists entered into force – ZU ” On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine Regarding Stimulation of the Development of the Digital Economy in Ukraine ” No. 1946-IX from 14.12.2021
What you should know about taxes in Diya.City
Residents of Diya.City have the right to choose the general taxation system and pay income tax, or choose the taxation regime with payment of corporate income tax under special conditions.
At the same time, Diya.City residents do not have the option to “choose a simplified taxation system (single tax)”. In the event that a company that is a single tax payer becomes a resident, in accordance with paragraphs 10 pp. 298.2.3 of the PKU , such a company is obliged to pay other taxes and fees, determined by the PKU , from the first day of the month following the tax (reporting) quarter in which the taxpayer acquired the status of a resident of Diya.City.
The transition to taxation as a resident of Diya.City – a tax payer under special conditions is possible once during a calendar year.
There are different options for switching to paying income tax under special conditions: submitting an application for choosing such a taxation system simultaneously with an application for acquiring the status of a resident of Diya.City or switching in the process of carrying out activities after acquiring the status of a resident of Diya.City.
The form of the application and the procedure for its consideration are approved by the Ministry of Finance.
In the case of submitting an application for the transition to taxation under special conditions during the application for acquiring the status of a resident of Diya.City, such residents are considered residents of Diya.City – tax payers under special conditions from the first day of the month following the quarter in which the legal entity was entered into Diya.City registry.
If the company decides to switch to paying income tax under special conditions already after acquiring the status of Diya.City resident, then the application for switching is submitted no later than 15 calendar days before the beginning of the next calendar quarter. Such a Diya.City resident is considered a tax payer under special conditions from the first day of the month following the quarter in which the relevant application was submitted to the supervisory authority.
If when registering as a resident of Diya.City, an application for transition to taxation as a resident of Diya.City – a tax payer under special conditions is not submitted, then such a company is considered a resident of Diya.City – a tax payer on general grounds.
If a resident decides to waive tax under special conditions, such an application must be submitted no later than 10 calendar days before the beginning of the new calendar year.
Income tax rates:
18% – tax rate for residents who chose to pay income tax on a general basis;
9% is the tax rate for residents who have chosen corporate income tax under special conditions.
If a Diya.City resident chooses the general taxation system, income tax is determined and paid according to the general rules defined by the Tax Code regarding income tax.
Income tax under special conditions is essentially PnVK. Its main idea is the taxation of a specified list of profit distribution operations and payments equivalent to them (operations for the withdrawal of funds from the company – subsection 135.2.1. item 135.2 of article 135 and item 141.9 -1 .2. item 141.9 -1 Article 141 of the Tax Code of Ukraine). Such operations include, in particular:
- payment of dividends;
- return of the deposit in connection with the withdrawal of the participant;
- payment of interest, commissions, fines under loan agreements;
- free supplies;
- financial assistance that has not been returned within 12 months;
- investing in objects outside the territory of Ukraine;
- a number of settlements with non-residents and a number of other payments.
Although the Diya.City stakeholder Ministry of Statistics declared one of the advantages of the regime – simplification of tax administration for residents, tax reporting in case of election of PnVK seems to be quite difficult.
On August 12, 2022, the DPSU published a draft order of the Ministry of Finance of Ukraine “On Approval of Changes to the Form of the Tax Declaration on Corporate Income Tax”, the purpose of which is to bring the declaration form into compliance with the provisions of the Code regarding the special regime of taxation by Diya.City residents under special conditions. It is planned that residents who have chosen PnVK should fill out the 19-sheet Tax Calculation for the operations of a Diya.City resident – a taxpayer under special conditions.
Exemption from VAT: from June 2022, IT schools that are residents of Diya.City are exempt from paying VAT. In particular, operations of supply by Diya.City residents through access to public educational, scientific and informational resources on the Internet, including through providing access to virtual classes, educational resources, educational services in the field of information technologies, including services, are exempt from taxation for the provision of higher, professional pre-tertiary and vocational education in such specialties as computer science, information systems and technologies, computer engineering, cyber security, data science, as well as services for the provision of other types of education, namely: training computer literacy (digital literacy), which includes services for teaching digital literacy, development, modification, testing and technical support of software, including computer games, business analysis training (for the purposes of development, modification, testing and technical support software support), building graphical interfaces, organizing quality control processes, system administration, project management, documentation development (for the purposes of software development, modification, testing and technical support).
VAT exemption for software products: until January 1, 2023, transactions for the supply of software products, as well as transactions with software products, the payment of which is not considered royalty according to paragraphs two to seven of sub-clause 14.1.225 of clause 14.1 , are exempt from VAT taxation Article 14 of the Tax Code. Currently, there are discussions about the necessity of extending the validity of such a benefit, however, as it turned out, there is no consensus even among representatives of the IT industry.
In general, the regime itself does not provide for special conditions for the payment of VAT or benefits specifically for Diya.City residents.
Taxes on dividends
Specifics of taxation of dividends accrued by a resident of Diya.City – a taxpayer under special conditions are established.
- Residents of Diya.City – taxpayers are exempted from the obligation to pay advance payments of income tax in case of payment of dividends under special conditions.
- In the event that a Diya.City resident did not pay accrued dividends on shares or other corporate rights for two consecutive calendar years, such dividends are not included in the calculation of the total monthly (annual) taxable income of the taxpayer – an individual.
Personal income tax and VAT on the income of Diya City resident specialists
5% – personal income tax on the following incomes of a Diya.City resident specialist tax payer (employee or gig specialist):
- wages (of all Diya.City resident employees);
- gig contract rewards;
- royalties for the creation of official works and the transfer of rights to official works.
A limit is established on the amount of income to which such personal income tax rate is applied in the amount of 240,000 euros per calendar year at the official exchange rate of the hryvnia against the euro, established by the National Bank of Ukraine as of January 1 of the reporting tax year.
If the amount of income received per year exceeds 240,000 euros, a rate of 18% is applied to the amount of such excess, while the obligation to declare and pay tax on the amount of excess rests with the natural person receiving the income.
However, a situation has arisen today in which startups that have become or intend to become residents of Diya.City will not actually be able to take advantage of the reduced personal income tax rates if they do not meet the requirements for the amount of remuneration in the amount of 1,200 euros or the number of specialists (9 people).
The profile law provides an opportunity for startups with certain criteria to become residents of Diya.City, in particular, in the case when the amount of the average monthly remuneration of the involved employees and gig specialists, starting from the calendar month following the calendar month in which Diya.City resident status was acquired and , of each calendar month is less than the equivalent of 1,200 euros at the official exchange rate of the hryvnia against the euro, established by the National Bank of Ukraine as of the first day of the corresponding calendar month (clause 2, part 1, article 5 of the Law on Diya.City) or the average number of employees and gig-specialists of a legal entity (in case of involvement) according to the results of each calendar month, starting with the calendar month following the one in which the legal entity acquired the status of Diya.City resident, is less than nine people (clause 2 part 1 of article 5 Act on Diya.City).
However, the Tax Code of Ukraine establishes the duty of a Diya.City resident who, in the corresponding calendar month, did not meet the requirements specified in clauses 2 , 3 , part 1 of Art. 5 of the Law on Activity. City, within the limits of the tax calculation of the amounts of income accrued (paid) for the benefit of taxpayers – natural persons, and the amounts of tax withheld from them, as well as the amounts of the accrued single contribution, independently calculate tax at the rate of 18% on the incomes of resident specialists Action .City (salary and gig contract remuneration paid during such calendar month and to pay it before submitting the tax calculation).
The EUV is set in the amount of the minimum insurance contribution both for the amount of wages (basic and additional wages, other incentive and compensation payments), and for the amount of remuneration to gig specialists for gig contracts.
Individuals who purchased shares (other corporate rights) of a Diya.City resident have the right to include in the amount of expenses for a tax deduction the amount of expenses for the purchase of shares (other corporate rights) of a Diya.City resident, provided that such expenses were incurred before the acquisition by the issuer of Diya.City resident status or during the period when such a Diya.City resident met the requirement established by clause 3 of part three of Article 5 of the Law on Diya.City (investments in startups).
Cooperation of Diya.City residents with single tax payers
The rules regarding the taxation of Diya.City residents for transactions with FOPs – single tax payers will come into effect on January 1, 2024 for Diya.City residents – general income tax payers whose annual income exceeds UAH 40 million, and Diya.City residents who chose a special taxation regime.
In 2024, the rules on the taxation of such transactions will work on the condition that the amount of acquisition of property, works, services (except royalties) from a single tax payer during the tax (reporting) year is determined in an amount that exceeds 50% of the amount of expenses from any activities (expenses related to operational, financial and investment activities), determined by the indicators of the Report on financial results (Report on total income), for the previous annual reporting period. From January 1, 2025, the rules on taxation will work on the condition that payments to such FOPs exceed 20% of the amount of expenses from any activity.
The tax regime established in Diya.City is an opportunity to create a kind of IT harbor in Ukraine with attractive taxes for the industry.
However, the regulation or complexity of tax administration, gaps in the taxation of startup specialists’ incomes do not contribute to the attraction of new residents and their retention in the country.
During the war, the IT industry showed stability of work in extraordinary conditions, however, a large number of specialists left Ukraine, many companies are considering the possibility or have already relocated their offices or parts of them to other countries. So, in my opinion, the task of the state today is to keep such companies and return specialists to Ukraine.