A separate group of single tax for IT individual entrepreneurs: what are the peculiarities of taxation in the IT sphere?

The cases of inquiries of entrepreneurs working in the field of IT technologies with regards to peculiarities of taxation of their entrepreneurial activities numerous times took place in the tax practice of our firm.

This question always arises when you are going to start an IT business and want to find out how exactly your activity will be taxed.

Quite often, IT entrepreneurs were interested in the issue of the new, so-called 5th Single Tax Group, which the government plans to implement through amendments to the Tax Code.

We will cover and take a close look at the main provisions of the bill, which were proposed for adoption as amendments to the Tax Code.

Related article: Special aspects of contractual relations in the field of it

What changes in taxation of the IT sphere were planned by the bill?

Officially, the goal of the bill was to preserve the existing dynamics of economic growth in the IT sphere, since according to statistics, in 2019, the IT sphere became the most dynamically growing sector of the Ukrainian economy. So, it has every reason to become the first export industry in Ukraine in the next couple of years.

And although this bill was still recalled, the authorities are still striving to implement the establishment of a separate 5th group of the Single Tax for IT entrepreneurs, and the previous bill, which will be finalized, will most likely become the basis for such changes.

In this regard, what information can we provide now, based on the analysis of the previous bill?

Business entities that may be payers of single tax of group 5, according to the bill are:

• Only sole traders;
• Entities that do not use hired labor at all;
• Entities whose income during the year does not exceed UAH 7,500,000;

Those that carry out economic activities in the following classes of KVED (Ukrainian Industry Classification System):

• 58.21;
• 58.29;
• section 62 of KVED DK 009: 2010;
• class 63.11;
• class 63.12.

Separately spelled out is the interaction of a sole trader - payer of the Single tax of group 5 with the Customer of their services.

So, a sole trader that will be on group 5 of the Single Tax, for the purpose of carrying out the above activities, will be able to use, for a cost or for free, the technical, software and any other production resources (including premises) owned by a sole trader or legal entities in whose favor such activities are carried out.

Benefit: the opportunity arises to work quite legally under the conditions of “coworking”. The above legal relations are somewhat similar to the legal relations of the contract, where a sole trader performs work (provides services), including through materials (resources) of the Customer - another business entity.

This form of cooperation will allow avoiding accusations of regulatory authorities in illegal (unregistered) labor relations, where a person actually conducts entrepreneurial activity, but carries it out in the premises of the Customer of his services at a convenient time for himself.

Another change that needs to be mentioned: The IT specialist-sole trader will not be able to hire employees, but will be able to provide services only in person.

Related article: Provided legal advice on the organization of it-business in Ukraine

How will such changes affect the IT business?

On the one hand, the changes that they want to accept make it possible for IT entrepreneurs to legally use “coworking” and the Customer’s resources for their services.

However, on the other hand, it is forbidden to hire employees. And the greatest outrage with IT businessmen is the annual increase in the tax rate (starting from 2021) by 1%. That is, from 2020 this can be 5%, and after 5 years there will be 10% of income, and that is despite the fact that  from 2020 the Unified Contribution for Compulsory State Social Insurance for the payers of the fifth group will amount to double the minimum insurance premium.

Therefore, speaking about the possible positive and negative consequences of the adoption of amendments to the Tax Code in the form of a separate 5th group of the Single Tax for IT entrepreneurs - there is no unambiguous point of view, at least for now.

But it can be said for sure that any increase in the maximum permitted amount of income during the calendar year will result in an increase in the tax burden in the form of an increase in the tax rate and the Unified Social Tax, which the sole trader will be required to pay to the state budget.

Therefore, IT-entrepreneurs see in these changes, first of all, an attempt by the authorities to ensure an increase in revenues to the state budget rather than  ensure the dynamics of the economic development of the IT sphere.

If you want to secure your business and find out which tax system to choose in your particular case - get in touch with our specialists!