Diia City as one of the best tax regimes for IT companies

How to become a Diia City resident?

A company can voluntarily become a resident of the regime subject to compliance with several requirements:

🔹the company is registered in Ukraine;

🔹conducts business in a certain permitted field of IT;

🔹90% or more of the income comes from IT activities;

🔹has at least 9 employees (not private entrepreneurs);

🔹average monthly salary of specialists from 1200 euros.

The permitted industries include the development and publishing of software and computer games, the development of artificial intelligence, online and cloud services, and activities related to the circulation of cryptocurrency, e-sports, and others.

A company can apply for Diia City residency as a startup if it meets the following requirements:

🔹the company is no more than 2 years old;

🔹 annual income does not exceed 1,167 minimum wages (7,818,900 UAH).

The applicant may have fewer than 9 IT professionals and a lower average salary. If a company acquires the residency status of a start-up in 2023, the company must meet the requirements regarding the number of employees and the average salary by December 31, 2024. Otherwise, she may lose her resident status and be removed from Diia City.

There are criteria for which a company cannot become a resident:

• the company is non-profit;
• 25% or more of the company’s capital is owned by the state;
• engages in game business;
• bankrupt company;
• has a tax debt in the amount of 10 minimum wages, etc.

Taxation

The applicant can choose a special tax regime and pay 9% income tax:

✔️ from the payment of dividends;

✔️ from interest payments in favor of non-residents;

✔️ from the free provision of property to a non-resident of Diia City paying tax under the special regime;

✔️ from payments received from investment activities in objects located outside the territory of Ukraine and from other operations.

According to the general tax regime, the company will pay 18% of the profit.

Companies that pay income tax at the rate of 9% will not be able to fully cooperate with single taxpayers. From 2024, the expenses of Diia City residents who are private entrepreneurs that pay a single tax should not exceed 50%, and from 2025 – 20%. Resident companies of Diia City paying income tax on a general basis – 18%, with an income limit of up to UAH 40 million per year will be able to work with private entrepreneurs without restrictions during the duration of the regime.

At a reduced rate of 5%, Diia City regime companies pay taxes on the income of specialists in the form of wages, royalties for the creation of official works or the transfer of rights to official works. They also pay a military levy at the rate of 1.5% and a single social contribution of 22% of the minimum wage in the country. The reduced rate applies to income that does not exceed 240,000 euros per calendar year. If the specialist’s income exceeds the amount, then the excess amount will have to be declared independently, and the income tax at the rate of 18% will be paid on it.

New contracts and opportunities in Diia City

Regime participants can conclude gig contracts with specialists. This is a new type of contract for the performance of works or the provision of services, which allows for flexible working conditions. The gig contract allows:

▪️ set an irregular working day;

▪️ determine the reward in a foreign currency, but must be paid in hryvnia;

▪️ set remuneration on an hourly or fixed basis;

▪️ perform work on personal equipment.

A gig contract is concluded for a certain period of time and is terminated in the event of the expiration of the period for which it was concluded, loss of the status of a resident of Diia City, or unilateral rejection of the contract.

In order not to disclose confidential information belonging to or about a Diia City resident, the parties may enter into a non-disclosure agreement (NDA). Anyone can be a party to the contract: an employee of a resident company, a potential investor, or a contractor. The agreement may provide for compensation or be free of charge, it specifies a list of data that is prohibited from being disclosed. Such information can be part of the software, code, project created by company employees, information about customers, etc.

In order to prevent the specialist from working for a competitor company or from creating a start-up with similar activities by the specialist, the resident of Diia City has the right to conclude a non-competition agreement (NCA) with the specialist. This will allow the company to avoid competitive actions on the part of its employees, gig specialists, or contractors, such as private entrepreneurs, and ensure its competitiveness in the market. Such an agreement is concluded for the period of cooperation of the specialist with the company and up to 1 year after the termination of the agreement. Competitive actions and the territory of the contract must be determined.

Conclusion

The Diia City regime is considered one of the best tax regimes for IT companies due to:

✔️ reduced tax rates (9% on company profits, 5% on personal incomes of employees);

✔️ the possibility of acquiring a residence for a newly created company and easy exit from the regime,

✔️ flexible working conditions for attracting specialists;

✔️ created legal mechanisms to preserve confidential information and avoid competition.