Taxation of Diia City residents: what taxes will IT companies pay in Ukraine?

The adoption of the Law of Ukraine “On Promotion of Digital Economy in Ukraine” gives rise to a new special legal regime of taxation for residents of Diia City. At the same time, there is no separate definition of the concept of taxation regime for Diia City residents in the Tax Code, so we will call it a “special regime”.

It is the issue of taxation of Diia City residents that is the most interesting for entrepreneurs today. It is important to understand whether obtaining residency will be beneficial for you. Is it easier and safer to work with specialists through a gig contract, and is it even worth thinking about changing the scheme of work for an IT company?

The system of taxation or what taxes do we pay?

Once a company receives the status of a Diia City resident, it does not have to switch to a special tax regime but can remain a taxpayer under the general system (income tax + VAT / without VAT). In other words, Diia City residents can be both taxpayers under the general taxation system and taxpayers under the special taxation system.

Please note! Single taxpayers (the simplified tax system) cannot be residents of Diia City.

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What is the difference in taxation regimes (systems)?

To decide whether it is beneficial to switch to a special regime, let's compare the two systems of taxation:

Certain transactions subject to 9% income tax:

1. The payment of dividends to the owner of corporate rights, if the owner is not a resident of Diia City.

2. Payment (monetary or non-monetary form) in connection with the withdrawal of the member/shareholder, if the member/shareholder is not a resident of Diia City.

3. Payment in connection with redemption or repurchase of own-issued securities if the recipient of the income is not a resident of Diia City.

4. Payment within a joint venture agreement.

5. Payment in favor of Diia City non-residents in the form of interest, commissions, renumarions, fines, and penalties.

6. Gratuitous transfer of goods, works, services, or property (including those discovered during the inventory, if their value exceeds 5% of the total value of the group of goods/property to which they belong).

Exception to p. 6:

• transfer of goods, and property to non-profit organizations;
• additional benefits subject to personal income tax and military tax;
• non-personified fringe benefits. 

7. Contribution to the authorized share capital of a person who is not a resident of Diia City under special regime.

8. Provision of non-refundable financial assistance to persons who are not residents of Diia City under special regime.

9. Providing refundable or non-refundable financial assistance to a related person who is not a resident of Diia City under special regime.

10. Payments under brokarage contracts with non-residents.

11. Royalties.

12. Transfer of funds by a resident of Diia City under special regime from accounts in a Ukrainian bank to accounts of this resident which are opened abroad.

13. Payments to single taxpayers (when purchasing goods, works, or services) in the amount exceeding 20% of total expenses of the previous reporting year.

Note: for newly established companies – part of the costs of the current year.

14. Purchasing of works/services, except for:

• A resident of Diia City receives the result of the work before the payment is made;
• A Diia City resident receives the result within 365 calendar days from the date of payment;
• Purchase of electronic services for which payment is made by a fixed payment on a "subscription" basis.

Company owners must take the choice of the taxation system seriously. After all, the amount of taxes that the company will pay to the state budget depends on the right choice. To avoid making the wrong choice, it is necessary to take into account all the aspects of the business and form a financial model, according to which the company plans to work in the coming year.

Please note! Your company must meet the criteria of Diia City residents, regardless of the taxation system you choose.

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Conditions for transition and waiver of special tax treatment for IT companies

Diia City residents have the right to switch to special tax treatment as of the first day of the next quarter following the date of application. In turn, it is possible to refuse special treatment only as of the following year after applying.

In other words, it is not as difficult to switch to special treatment as it is to refuse it. That is why we recommend making a financial calculation of benefits before deciding on the taxation system. This is how we begin to work with our clients to optimize the taxation of IT business in Ukraine.

The legislation defines the rules of annual confirmation by Diia City residents of their eligibility for residency.

All Diia City residents, annually by June 1 of the next reporting year, must submit a report on compliance with the criteria, along with an independent auditor’s report.

Please note! If Diia City residents did not fully meet the criteria at the time of application for resident registration, they will be registered as a resident, but after 6 months they must file reports with an independent auditor's report confirming that they have begun to meet the criteria for resident.

You may also like: Software rights for an IT Startup in Ukraine.

Who benefits from switching to a tax regime?

To understand the benefits of choosing the taxation system, here is an example of a financial calculation in one of our client's cases.

The IT company, a resident of Diia City on the general system of taxation (profit tax of 18%, without VAT). In this case, the company has no controlled transactions. 95% of the costs – the purchase of services from single taxpayers.

• The annual income of the company – UAH 101 million.
• The total annual cost of services – UAH 92.8 mln.
• Other expenses for the year – UAH 1.7 mln.

The owner of the company decided to pay dividends (to the founder of the sole proprietorship) in the amount of UAH 500 thousand.

The financial result of the company amounted to UAH 6.5 mln, accordingly income tax (18%) amounted to UAH 1.17 mln.

The total amount of profit tax that the company will pay under the general system of taxation, was UAH 1.17 million.

Note. According to the current legislation, the payment of dividends to an individual is subject to 5% personal income tax and a 1.5% personal income tax.

Accordingly, the company will pay:

• Personal income tax = UAH 500 thousand *5% = UAH 25 thousand.
• Military tax = UAH 500 thousand *1,5% = UAH 7.5 thousand.
• The client received dividends in the amount of UAH 467.5 thousand.

If our client were to switch to a special tax regime, the amount of taxes would be the following:

• Dividends taxation = UAH 500 thousand * 9% = UAH 45 thousand.
• Acquisition of services from single taxpayers = UAH 75.6 thousand. * 9% = UAH 6.8 thousand.

The total amount of profit tax to be paid by the company at a special system of taxation amounted to UAH 51.8 thousand.

That is, in this case, we see the benefit in the transition to the special tax regime in the amount of UAH 1.12 mln.

In our case, the company benefited from the transition to a special tax regime. However, when deciding on the choice of tax system we recommend a careful analysis and tax testing of all transactions that your company plans to make during the reporting year.

If you want to get an answer as to whether you should get residency in Diia City, and what impact it will have on the economy of your company, don’t hesitate to contact us.

Not only will we provide you with a preliminary audit and answers to these basic questions, but we’ll get you a residency in Diia City if that’s the best route for your company.

Please click here for our service fees.