On December 18, 2021, Law No. 1946-IX “On Amendments to the Tax Code of Ukraine Concerning Stimulating the Development of the Digital Economy in Ukraine” was published, which provides for IT companies and their employees to introduce special tax regimes with lower tax rates.
The Law will come into force on January 1, 2022.
Thanks to Diia City, IT companies will be able to build a transparent corporate structure, have better access to investment and work within a favourable tax system. The Diia Ctiy Project is designed to liberalize labour relations and protect Ukrainian and international startups.
The Law is aimed at providing tax incentives to the IT industry and establishes a comprehensive system of measures necessary for the development of the digital economy in Ukraine.
The Law introduces:
- special taxation regime for residents of Diia City – IT companies that meet the requirements provided for by the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” and will be included in a special register, which will be maintained by the authorized body – the central executive authority, which ensures the formation and implementation of state policy in the field of digital economy;
- special taxation regime for certain incomes of employees of Diia City residents and gig specialists attracted by them (specialists who perform work (provide services) as part of the implementation of their economic activities by DiIa City residents based on gig contracts concluded according to the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine”).
The Law provides for a special tax regime for residents of Diia City – legal entities, namely:
Legal entities can switch to a special mode if they:
- Carry out IT activities (types of activities provided for by the Law);
- They receive 90% of their revenue from IT activities;
- They pay an average monthly salary of at least EUR 1,200;
- Hired at least 9 employees and/or hired specialists under gig contracts.
The final provisions of the Law provide that during the period specified in Part Two of Article 3 of the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine”, the state guarantees the stability of the tax conditions defined by this Law for residents of Diia City, as well as employees and gig specialists attracted by them.
Guarantees of stability of tax conditions do not apply to changes in the legislation of Ukraine concerning defence, national security, public order and environmental protection.
The Law stipulates that the Cabinet of Ministers must develop a mechanism for compensating funds paid to taxpayers in connection with the exercise of the right to a tax discount within three months, if the personal income taxpayer pays tax to another budget.
Key tax changes:
- The ability to choose which corporate tax to pay: distributed profit tax (DPT) in the amount of 9% or income tax – 18%.
- Special rates for employees of IT companies and gig specialists: personal income tax (PIT) – 5%, unified social contribution – 22% of the minimum wage, military duty – 1.5%. If a specialist receives more than EUR 240 thousand per year, all income above this limit will be subject to 18% personal income tax.
- Transition period from the individual entrepreneur model to gig contracts and employment contracts. Starting from 2024, resident companies’ expenses for single taxpayers (including individual entrepreneurs of Group 3) must not exceed 50%, and starting from 2025 – 20%. Until then, there are no restrictions. Taxation of individual entrepreneurs who cooperate with residents of DiIa City will remain at the level of the current rates.
- Amounts in excess of the limit for DPT payers will be taxed at the rate of 9%. Income taxpayers will have to include expenses for individual entrepreneurs that exceed the permitted 20% in the financial result.
- Resident companies that will pay income tax and whose annual income does not exceed UAH 40 million will be able to work with individual entrepreneurs without any restrictions even after 2025.
- 0% on the income of individuals as dividends accrued by a resident company, provided that they are paid no more than 1 time in 2 years;
- Tax discount (with personal income tax) on the amount of investments in Ukrainian startups.
The essence of taxation of Diia City residents who have chosen the DPT is that:
- you will have to pay the DPT at the rate of 9%;
Although sometimes, you will have to pay income tax at the rate of 18%. Namely, in the case when a resident of Diia City:
— is a controlled person. Income tax must be paid on the adjusted profit of the CFC (clause 141.91.4 of the TCU);
— performs controlled operations that do not comply with the “arm’s length” principle (clause 141.91.3 of the TCU);
- you will only need to pay the tax for the annual tax period (clause 137.10.3 of the TCU). You will also have to report only on an annual basis;
- the withholding tax paid on income paid to non-residents from specific tarns cations will be included in the payment of the DPT for such transactions. But this must be done in the amount of no more than the amount of the accrued DPT (clause 137.10.1 of the TCU).
That is, if from a certain income of a non-resident withholding tax at the rate of 15% must be paid, and under the IT special regime the rate is 9% of the amount of this transaction, the sum of withholding tax paid in the amount of 9% will be credited as payment of the DPT. The remaining 6% (15%-9%) will simply be paid to the budget and will not reduce the accrued DPT calculated for other types of transactions;
- they are exempt from paying an advance payment from the amount of dividends paid to the legal entity-founder (clause 57.11.8 of the TCU). This is not surprising, since the DPT is paid for such transactions;
- it is not the financial result that will be taxed, but certain transactions in the period of their implementation.
Here is a list of such transactions in the table.
|Type of transaction||Which is taxable|
|Payment of dividends (clause 18.104.22.168 of the TCU)||Payment to all corporate rights holders, except (clause 22.214.171.124 of the TCU);
— payments to residents of Diia City who pay the DPT;
— in case when refinancing occurs, provided that this does not lead to a change in the proportions of ownership;
— transactions equated to dividends (paragraphs 4-6 of clause 14.1.49 of the TCU)
|Payments in connection with shareholder’s withdrawal (clause 126.96.36.199 of the TCU)||Payment in connection with the withdrawal of a participant/shareholder, liquidation of a legal entity, repurchase of shares (stakes, units) in an amount exceeding (clause 188.8.131.52 of the TCU):
— cost of the contribution;
— cost of purchasing shares (stakes, units).
Payments to individuals that fall out of taxation if they are subject to personal income tax
|Payments made in connection with repayment or repurchase of own securities (clause 184.108.40.206 of the TCU)||Payment in connection with the repayment or repurchase of the securities’ own issue in the amount that exceeds the purchase price of such securities, including when they are initially placed (clause 220.127.116.11 of the TCU).
The payment is not subject to taxation:
— for residents of Diia City who pay the DPT;
— for individuals, if the payment is subject to personal income tax
|Payments under the agreement on joint activities (clause 18.104.22.168 of the TCU)||Funds and/or property that are paid (returned) within the framework of joint activities in an amount exceeding the sum of funds and/or the value of the property provided for joint activities (clause 22.214.171.124 of the TCU).
Payments to residents of Diia City who pay the DPT are not subject to taxation
|Payment of interest (clause 126.96.36.199 of the TCU)||Payment of interest (including those that were included in the amount of debt (loan body)), commissions, other remuneration, refunds, fines, penalties in favour of:
— other residents, except for residents of Diia City who are DPT payers, resident and non-resident banks (except for those mentioned below) (clause 188.8.131.52 of the TCU);
— related non-residents or non-residents, if the total amount of debt owed to all non-residents exceeds the amount of equity more than 3.5 times (clause 184.108.40.206 of the TCU);
— non-residents registered in the states that are low-tax jurisdictions (clause 220.127.116.11 of the TCU)
|Free of charge transfer (clause 18.104.22.168 of the TCU)||Transfer of property (provision of works, services) without compensation of cost, including free of charge, except for transfer (clause 22.214.171.124 of the TCU):
a) to non-profit organizations (for them, see their rules below);
b) for advertising purposes, if the value of the gift does not exceed the amount of 2 living minimums as of January 1 (in 2022 — UAH 4,962);
c) property (works, services) to an individual;
d) additional benefits to their employees who are not subject to personal income tax, because they are not personalized;
e) residents of Diia City who pay the DPT
|Payment of financial assistance (clause 126.96.36.199 of the TCU)||Providing financial assistance:
1) non-refundable to all persons, except for those who are residents of Diia City and pay the DPT;
2) both refundable and non-refundable, provided by arelated person (individual or legal), except for the DPT payer;
3) refundable to an unrelated person if it is not returned within 12 months or within 12 months it will be forgiven.
This does not apply to providing financial assistance:
— to non-profit organizations that are national universities, in the amount of 1% of net income of the previous year, and to all other non-profit earners in the amount of0.5% (clause 188.8.131.52 and 184.108.40.206 of the TCU);
— refundable to its employees while they work for a resident of Diia City;
— to individuals subject to personal income tax and non-refundable financial assistance mentioned in paragraphs 4-6 of clause 14.1.257 of the TCU;
— in the form of membership fees to foreign (international) organizations in the amount not exceeding 300 subsistence minimums (in 2022 — UAH 744,300)
|Payments to non-residents (except for their permanent representative offices) (clause 220.127.116.11 of the TCU)||Payments to non-residents in connection with (clause 18.104.22.168 of the TCU):
— repayment of credits to accounts opened not with Ukrainian banks;
— repayment ofdebts, except for debts for property located on the territory of Ukraine or imported to Ukraine;
— repayment of fines, charges, penalties, damages, etc. provided for by civil legislation or contracts;
— investments in investment objects (including the acquisition of property) located outside the territory of Ukraine;
— by purchasing works (services) in the amount determined by clause 22.214.171.124.4 of the TCU
|Sale of property (works and services) (clause 126.96.36.199 of the TCU)||The value of property (works, services) under a contract that provides for the payment of compensation, except for (clause 188.8.131.52 of the TCU):
— deliveries after receiving payment (prepayment);
— or when funds from the sale are credited to accounts opened in Ukrainian banks within 365 calendar days.
Deliveries with prepayment to Diia City residents who pay the DPT are not subject to taxation
|Intermediary contracts with non-residents (clause 184.108.40.206 of the TCU)||Payment of funds and/or transfer of property by a resident under a commission agreement, assignment agreement, agency agreement or similar agreements, if the resident of Diia City is a permanent representative office of a non-resident (that is, it provides intermediary services only to one non-resident), etc. (clause 220.127.116.11 of the TCU)|
|Royalties (clause 18.104.22.168 of the TCU)||Royalties paid:
— to a resident (excluding residents of Diia City), but only in the amount exceeding the annual amount of royalty income, increased by 4% of net income from sales of products (clause 22.214.171.124 of the TCU);
— to non-residents, listed in clause 126.96.36.199 of the TCU, and this includes non-residents registered in states with low-tax jurisdictions, for objects whose intellectual property rights were first acquired by a resident of Ukraine, etc
|Contribution to the authorized capital (clause 188.8.131.52 of the TCU)||Contributions of the founder and/or participant to the authorized capital, to joint activities, to trust management, if the person to whom the contribution was made is not a resident of Diia City, a DPT payer (clause 184.108.40.206 of the TCU)|
|Transfer of funds||Funds transferred from the accounts of a resident of Diia City in Ukrainian banks to his/her accounts opened abroad (clause 220.127.116.11 of the TCU)|
|Repayment of debts to residents (clause 18.104.22.168 of the TCU)||Repayment of fines, penalties, etc. to residents, related parties and/or zero income taxpayers, except for persons who are residents of Diia City and DPT payers (clause 22.214.171.124 of the TCU)|
|Payments to simplified taxpayers after 2024||Payments to simplified taxpayers for the purchase of property, works, and services (except for royalties) (clause 126.96.36.199 of the TCU).
At the same time, you will only need to pay the DPT from such amounts starting from 2024, not the entire amount, but only part of it will be subject to taxation.
— during 2024, only the amount exceeding 50% of the cost amount for the previous year;
— in the future, the amount exceeding 20%
Transactions for distributed profit tax
Both transactions in monetary terms and transactions in a form other than monetary terms fall under the taxation of DPT. When performing a transaction in non-monetary form, the amount from which the DPT should be paid must be determined at a level not lower than the usual price.
At the same time, the usual price for these transactions (except for the definition of controlled operations) is set at the level of the contract price, but cannot be lower (clause 14.1.711 of the TCU);
- for purchased goods (works, services) — purchase prices of property (works, services);
- for non-current assets — the book value (residual) as of the beginning of the calendar month during which transactions of sale (alienation), liquidation of such non-current assets are carried out;
- for self-produced products (except for non-current assets), works, and services — the production cost.
To choose the special Diia City mode, you must submit an application in electronic form to the STS at your tax address. You can switch to this special mode from the beginning of any quarter, but only once a year.
The special mode will take effect on the first day of the month following the quarter in which the application was submitted. Since the special mode will start working from January 01, 2022, it is theoretically possible to choose it only from the beginning of Q2 2022.
You can independently cancel the special Diia City mode only from the beginning of a certain year (for this purpose, an application is submitted no later than 10 calendar days before the start of the new year).