Indexation of salaries of IT companies in Ukraine

Wages and salaries are the remuneration paid for work performed by an employee with whom you, as the employer, have an employment relationship. Wages may include wages, allowances, bonuses and many other additional benefits.

It is the employer’s responsibility to make payments related to wages on time and in full and to make sure the wages are in line with current levels of purchasing power.

What does this mean? 

As the Consumer Price Index (CPI) increases, the employer must index wages. 

Wage indexation is a social guarantee of the employer to the employees, which is expressed in the adjustment (increase) of wages due to price increases.

In this article, we will talk about wage indexation in the IT sphere, specifically about its application to a traditional IT company, with its own staff and Diia City residents.

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What is the difference between Diia City residents and Diia City non-residents?

1. Residents work under a new legal regime (designed for their activities).
2. This legal regime has certain simplified mechanisms of doing business, which allows more resources to be involved directly in business development.
3. To become a resident of Diia City, it is necessary to meet the criteria in terms of qualifying income, the amount of wages of employees and hygienists, as well as the number of officially registered employees.

In other words, if you are not a Diia City resident, your employees’ remuneration is accounted for and taxed according to generally accepted rules. And if you become a resident of Diia City, you have certain benefits, including with regard to the accounting of wages.

So what is the pretext for indexation? Wages shall be indexed when the Consumer Power Index exceeds 103%. 

For example, an employee is entitled to be compensated for an increase in inflation in the amount of:

• UAH 223.29 with the 9% inflation index;

or

• UAH 74.43 UAH with the 3% inflation index .

It would seem that the amount of compensation is insignificant, but the legislation gives the employee the right to receive this compensation, and the employer is obliged to make this accrual.

Unlike other spheres of activity, labor remuneration in the IT sphere always corresponds to the size of market prices, and sometimes even exceeds them. But even the correspondence of the level of wages to the market price does not give the employer the opportunity not to apply indexation.

Do Diia City residents need to have their salaries indexed?

Current law (regarding indexation of wages) says that the adjustment of remuneration, compensation and other payments to employees and gig-specialists to pay capacity is carried out by Diia City residents on the basis of the requirements for residents, namely:

• The average monthly remuneration for employees and gig-specialists in the amount of at least EUR 1,200.00;
• Periodic revision of remuneration in accordance with the terms of the employment and gig-contracts.

Based on the above, Diia City residents are exempt from the obligation to index wages.

This is one of the benefits of Diia City residency.  Learn more about the benefits of residency and the cost of services to obtain it here.

Further, we will talk about the direct indexation process for companies that are not residents of Diia City.

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What revenues are subject to indexation in IT companies?

All incomes of individuals, which are not a one-time payment, are subject to indexation. Such income includes:

• salary;
• regular bonuses and allowances;
• regular guarantee and compensation payments.

Please note! The indexation amount is calculated not on the employee’s income, but on the subsistence minimum at the indexation date. In 2022 this amount is: from 01.01.2022 - UAH 2,481, from 01.07.2022 - UAH 2,600, from 01.12.2022 - UAH 2,684.

Which incomes are not subject to indexation?

• sick leave pay;
• business travel allowance;
• vacation pay;
• one-time payments;
• income of individuals from rent, business activities.

What data is used to calculate indexation?

Basic parameters for calculating indexation:

• base month - the month in which the salary was last changed;
• consumer price index - % increase in prices;
• subsistence minimum as of the indexation date;
• indexation threshold - 103% (for 2022);
• cumulative consumer price index (CCPI) - successively multiplied indices until the moment of exceeding their indexation threshold.

The calculation of the indexation is carried out according to the following formula:

Indexation = subsistence minimum*(CCPI%-100%)/100%

Please note! The index excess is counted consecutively from the date of the employee’s last salary increase.

Let’s show how to determine the excess using the example of an employee whose salary was set in January 2022 (base period).

IRA for January 2022 = 101.3% (base period, in connection with this calculation takes it with a 100% mark)

IRA for February 2022. = 101.6%

IRA for March 2022. = 104.5%

IRA for April 2022. = 103.1%

Calculation of the excess for February 2022 = (100*101.6)/100 = 101.6%.

Result: there is no excess in February - no indexation needed.

Calculation of the excess for March 2022 = (100*101.6*104.5)/100=106.2%.

Result: in March, the inflation index exceeded the norm of 103% - indexation of wages is required.

We have just passed the first of 5 steps in the calculation for indexation.

After this calculation, the following question immediately arises, “Is there an exception for anyone? My employees get paid above market wages. Why would I do indexing as well? It’s such a complicated mechanism.”.

Indeed, this process is labor-intensive, and as a result of the procedure the employee receives not so much compensation (according to previous statistics it ranges from UAH 10.00 to UAH 500.00).

Unfortunately, the current legislation obliges all business entities (regardless of business structure) to apply indexation. And martial law or quarantine do not provide for any relaxations 

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Risks and penalties of neglecting wage indexation in Ukraine

Since indexation is a social guarantee, failure to accrue it is equivalent to failure to accrue wages (and, accordingly, to non-payment).

The penalty for failure to accrue indexation is 2 minimum wages (on the date of the violation) for each employee. The minimum wage from 01.10.2022 is UAH 6,700, respectively, the penalty will be UAH 13,400 per employee from 01.10.2022.

If the company has at least 10 employees, the penalty will be UAH 134,000 or more.

True, there are situations when the indexation is suspended (which is a kind of “loophole” to avoid monthly indexation). Now we will talk about the suspension of indexation in more detail.

When can you suspend the indexation of wages?

Suspension of indexation begins in the month of the salary increase.

Please note! The amount of increased salary must be higher than the expected amount of indexation. 

For example, as of 4.01.2022 an employee had a salary of 10,000 UAH, and on 1.05.2022 increased his salary by 3,000 UAH.

According to the previous example of calculation of the excess of inflation index, we see that the indexation must be conducted in May 2022 and its amount will be 153.82 UAH (Living wage * CPI = 2481 * 6.2%). Taking into account that the salary was increased on May 1 and its amount exceeds 153,82 UAH, indexation is not conducted in this month. 

Note: If an employee’s salary was increased by UAH 100 we would need to make an indexation on the difference, i.e. UAH 53,82. This situation arises quite rarely, but we want to clarify this issue so that you will be aware of such nuances.

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How do you know when it is the time to raise salaries, and what size they should be?

Often salary increases (in order to avoid indexation) are made on the basis of inflation rate statistics. Approximately once every six months. But, due to the current martial law, the rate of inflation has increased. For example, the consumer price index for 2020 was 110%, and for the 6 months of 2022 - 119%.

But even with such a mechanism, we must not forget about the expediency of each economic operation:

• it will look strange if your company will increase salaries by 300-500 hryvnias per month;
• your company must have a documented confirmation of the need to increase salaries;
• labor costs for the preparation of documentation on the increase of salaries are many times higher than the labor costs for indexation.

The best way to understand whether this or that solution is advantageous for the company is to analyze the accounting activities and get a consultation directly for your company.

Our company provides a range of services for IT companies and other enterprises in Ukraine, including:

• audit of the company’s accounting processes and recommendations for elimination of the identified irregularities;
• trable-shooting - solving a specific problem of the company, with the help of a team of accountants and lawyers;
• assistance with obtaining Diia City residency and calculation of profitability of such transition;
• accounting and legal services for the company in Ukraine (personnel matters, accounting processes, etc.).

If you want to make sure that the accounting processes in your company are organized correctly, taxation is optimized, and you want to find financially profitable solutions, don’t hesitate to contact us.

The cost of obtaining Diia City residency here.

Everything about accounting processes and their organization in Ukraine here.