Diia.City – the world's best IT regime?

Taxation

Taxation specifics can be a critical factor for owners aiming to minimize expenses. Residents can opt between two taxation models:

1. The first, more traditional, is the profit tax at 18%, levied on the company’s revenues after all expenses are deducted.
2. The second, which is newer to Ukraine, is the capital withdrawal tax, set at 9%, applicable on funds withdrawn from the company.

In addition to these taxation features for companies, there are other specifics and restrictions to consider:

• The personal income tax (PIT) for employees and gig specialists is fixed at 5%, substantially lower than the 18% rate for non-residents. This rate applies provided that the employee’s annual income does not exceed €240,000 and the company, especially startups, meets certain criteria regarding the number of employees (at least 9) and the average monthly remuneration (at least €1,200).
• The unified social tax (UST) is set at 22% of the minimum wage, which significantly reduces company expenses.

Furthermore, the state imposes additional restrictions on the use of services by single taxpayers, impacting collaborations with individual entrepreneurs and limited liability companies. For 2024, this threshold is set at 20% and will increase to 50% in 2025.

Following the anticipated signing of Bill No. 9319 by the President, startups will no longer be required to maintain a minimum of 9 people with an average salary of €1,200 to benefit from the preferential conditions (5% PIT instead of 18%). However, less favorable changes are also being introduced:

Firstly, if a startup does not meet the criteria by the end of the second year of residency in “Diia.City,” it will be required to pay additional PIT and UST. Secondly, the military levy has been raised from 1.5% to 5%, affecting all taxpayers, irrespective of their status or special tax regimes.

Employment

“Diia.City” introduces an innovative form of professional engagement. In addition to the traditional collaboration forms regulated by the Civil and Commercial Codes and employment governed by the Labor Code, there is now an option for a gig contract with a gig specialist, as stipulated by the Ukrainian Law “On ‘Diia.City’.” This law essentially blends elements of both freelance (FOP) and traditional employment statuses.

This framework allows for more flexible hiring than standard employment contracts, whose original legislation dates back to 1972. Employers can now tailor work schedules to specific projects and accommodate the unique needs of IT companies, such as asset transfers, remote work, and non-compete agreements.

Moreover, gig specialists maintain the fundamental rights afforded to employees, including benefits for temporary disability, pregnancy, and a minimum vacation allowance of 17 days. This arrangement offers a potential win-win scenario, where employers can explicitly define working conditions, and specialists are assured of their rights—a significant improvement over the ambiguities often present in freelance (FOP) arrangements.

Additionally, this setup can benefit companies by reducing the risk of unjustified tax authority inspections regarding concealed employment relationships, particularly during investment evaluations. Company owners can demonstrate to investors a clear roster of developers, designers, and other project-involved personnel, with their duties to the company clearly defined and legally guaranteed, unlike the more opaque arrangements often associated with FOPs, which may not be as transparent to foreign observers.

Other сonsiderations

In addition to the previously mentioned aspects, there are several other features that may be pivotal for companies aiming to secure residency status in “Diia.City.”

Investment Attraction to a Holding Structure: This aspect is particularly relevant for owners who initiated their product development in Ukraine and have branched out into the international market in search of additional investments. This arrangement allows a group of companies to attract investments to a parent company located in a different jurisdiction while leveraging a subsidiary in Ukraine to support the team. Such a setup significantly alleviates the tax burden on salary payments and effectively displays expenses incurred in product refinement.

Intellectual Property Rights Transfer: “Diia.City” residents are afforded extra safeguards to protect intellectual property (IP) rights. The legislation clearly dictates that personal non-property IP rights are retained by the gig specialist, whereas the property rights to the IP are transferred to the “Diia.City” resident immediately following the creation of the product (such as code, design, etc.).

Non-Compete Agreement (NCA) Application: The law expressly allows for the formation of agreements with specialists to abstain from engaging in competitive activities. These agreements can last up to 12 months and must detail:

• The geographic area covered by the obligation,
• An exhaustive list of activities deemed competitive,
• Material benefits provided to the specialist in exchange for their commitment to refrain from these competitive actions.

These conditions mirror those found in Western countries, where non-compete clauses are permissible. However, in Ukraine, there is still a lack of substantial judicial precedent regarding this provision, which complicates the determination of how potential restrictions on employees’ rights will be handled.

Published by AIN.UA

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