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Tax exemptions for software developers in Ukraine

For many specialists engaged in the sphere of information technologies an important question is the choice of business legal form of economic activity. Some programmers prefer the work in the staff of specialized organizations or computer firms which pay salary and other types of income for them. However, many engineers and programmers prefer carrying out an individual activity, and therefore the problem of choice of the most efficient taxation system becomes relevant for them.

It is provided by the Law of Ukraine that carrying out the entrepreneurial activity requires state registration. In case a specialist does not plan getting registered as business entity, he/she will be restricted in part of carrying out the entrepreneurial activity on sale of the software products made. According to the resolution of the Plenary Assembly of the Supreme Court of Ukraine “About practice of application of the law by the court about responsibility for individual crimes in the sphere of economic activity” dated 25.04.03 No. 3, sale of the products made, without registration of a business entity is possible not more than three times a year. It is important to know that the entrepreneurial activity without state registration is an administrative offence for which the responsibility is provided by Article 164 of the Code of Administrative Offence of Ukraine.

Various business legal forms of economic activity are provided by the Commercial Code of Ukraine and by the Law “About state registration of legal entities and individual entrepreneurs. A programmer may get registered as an individual entrepreneur, open a limited liability company or a private enterprise. After registration of business entity, tax registration and selection of taxation system follow.

A programmer who is an individual entrepreneur may use the common taxation system or the simplified taxation system. The common taxation system provides registration as a VAT payer and getting advantage provided by Article 26-1, sub-clause 2, clause XX of the Tax Code of Ukraine (exemption of transactions of software products from VAT).

The simplified taxation system gives a possibility to select a certain group depending on particularities of financial economic activity. For programmers, application of group 2, 3 or 5 of the single tax is possible. The choice depends on amount of annual income, number of hired workers, buyer-agents. For the second group, the single tax rate is established in amount of 20% of the minimal salary, the number of employees is not more than 10, and the sum of annual income does not exceed 1 million Hrn, and services can be used by business entities who are single tax payers. The third group provides single tax in amount of 5% of the income received that should not exceed 3 million Hrn, the number of employees is not more than 20, the buyers can be natural persons and business entities, including non-residents. For tax payers of group 3, it is possible to pay VAT, and then the single tax rate is reduced to 3% of income. The fifth group is single tax rate 5% of income in case VAT is paid, or 7% of income in amount not more than 20 million Hrn, the number of employees is up to 20 persons, the buyers are natural persons and business entities, including non-residents.

In case of registration of a private enterprise or a LLC, it is possible to choose the common or the simplified taxation system. 4 or 6 groups of single tax are provided for legal entities. For group 4 tax payers, the rate is 3% in case VAT is paid or 5% in case VAT is included in single tax, the number of employees is not more than 50 persons, and the sum of annual income is up to 5 million Hrn. The sixth group: tax rate is 5% in case VAT is paid, or 7% of the income received that does not exceed 20 million Hrn, the number of employees is up to 50 persons. The buyers for legal entities of group 4 and 6 can be natural persons and legal entities, including non-residents.

It is important to remember that single tax payers (legal entities and natural persons) may settle payments in monetary form only.

Certain advantages in case of sale of software products are provided for private enterprises or LLC based on the common taxation system. Those transactions are exempted from VAT taxation, and the 5% rate is used as income tax for business entities engaged in software products industry (Article 10, sub-clause 4, clause XX of the Tax Code). With that, a legal entity should be registered as tax payer that uses special taxation procedure (Article 15, sub-clause 10, clause XX of the Tax Code).
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