Tax exemptions for startup companies in Ukraine

Special requirements that are raised for an enterprise according to the Law of Ukraine “About innovation activity” complicate the financial support of IT-startups and other promising projects. Often the persons who implement a progressive business idea in the sphere of innovation technologies have no special knowledge and time for registration of an innovation project. Therefore the tax advantages get a regulatory meaning for business entities that are engaged in innovation activity.

The principal normative legal act that defines the procedure of providing and application of tax advantages is the Tax Code of Ukraine.

With that, there is no such a notion as an “innovation enterprise”, and the tax advantages are defined by a specific type of business entity’s activity. At present, depending on the type of the economic activity performed, the enterprises of innovation sphere can get advantages on VAT and on income tax, and in some cases in land fees, too.

At present, the Tax Code of Ukraine provides the temporary (until 01.01.2023) advantage on VAT for supply of software products. Results of computer programming, including websites and online services, belong to those products. Consequently, an IT startup is exempted from VAT. Advantage on income tax for business entities engaged in software products consists in application of a reduced rate (5%). It should be noted that according to the Tax Code, that business entity should be registered by the controlling authorities as a payer that uses a special taxation procedure. For that, a business entity should comply with certain criteria during the last four accounting periods (quarters), and namely:

• specific amount of income from performance of economic activity on sale of goods (works, services) in the software products industry is not less than 70% of the total income earned;
• initial cost of fixed assets or intangible assets exceeds 50 amounts of minimal salary set upon January 1 of the accounting (taxable) period;
• business entity has no debts for tax;
• no resolution was taken regarding the business entity about recognizing the debtor as a bankrupt according to the Law “About reestablishing debtor solvency or recognizing him as a bankrupt”.

For new business entities engaged in software product industry which have performed the activity for not less than two complete accounting quarters before the day of submission of application about registration as a payer that uses a special taxation procedure, it is allowed using the rates of economic activity during the actual functioning.

The Tax Code pays special attention to the types of activity which relate to software product industry and, accordingly, give the right for tax advantages. The following belongs to such types of activity: software publishing; computer programming, including development of databases and websites; consulting in the matters of informational support; activity in management of computer equipment; creation and introduction of information technology complexes, networks and systems created based on information technologies; data processing and placing it on websites, and activity connected with databases. Accordingly, the main forms of IT startups using modern information technologies will have advantages on income tax.

Along with that, some norms of the Tax Code specify the use of advantages in concrete sphere of activity in which startups can work. For example, operations on import of equipment are exempted from VAT taxation, which equipment functions on renewable energy sources and technical means that are used for production of alternative types of fuel. Accordingly, in case the planned startup functions in those spheres of power industry, then, when performing the above mentioned operations, it will be exempted from charge and payment of VAT. The business entities that perform activity on production of bio-fuel, electric and thermal energy using the bio-fuel are exempted from income tax.

Besides that, the reduced rate of land payment is used for enterprises that produce electric power from renewable energy sources. It (the rate) is 25% of the standard rate, on condition that the machines and equipment required for production of electric power are located on the land plot.