Full-fledged resident of Diia City or Startup: what to choose?
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A client reached out to our company to establish their own IT business and collaborate with foreign clients with whom certain agreements had already been established. After working as a freelancer for an extended period, utilizing their own private entrepreneur status for operations, the client, upon realizing their readiness to create a structured business with a team and a systematic workflow, began exploring options for the proper organization of the business.
Considering that the client's customer base would be international, they were inclined to structure the business in foreign jurisdictions or Ukraine. To provide the client with a comprehensive understanding of working with foreign jurisdictions and the available options in Ukraine, we assembled a team of legal experts specializing in business structuring in Ukraine and abroad, conducting several consultations with the client.
Following our collaboration, the client desired to examine two approaches to structuring his business: either through a holding company registered in Malta or by exploring the Ukrainian option for IT companies – Diia City. After multiple rounds of discussion, the client decided to register a legal entity in Ukraine and acquire resident status in Diia City. Noteworthy advantages of Diia City that particularly appealed to the client included:
- Clear "rules of the game" and adherence to Ukrainian jurisdiction. The entire business could be autonomously managed from Ukraine, with tax obligations fulfilled in the country.
- A more cost-effective registration process, lower company maintenance expenses, and the absence of "nominees" or expensive foreign accountants or consultants.
- The flexibility to collaborate with Private Entrepreneurs or gig workers.
- Consistency in rules and the enduring nature of Diia City over 25 years.
- Tax benefits associated with the resident status of Diia City.
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The process of registering in Diia City and applying the special tax regime of Diia City
To attain resident status in Diia City, the initial step involves establishing the corresponding legal entity. This legal entity must meet specific requirements to maintain resident status.
- The resident's type of activity must align with the legally defined categories for Diia City (such as programming, educational activities in the field of information technology, etc.).
- The average monthly remuneration to employees and gig specialists must not be less than 1200 euros.
- The number of employees and gig specialists must be at least 9.
- The qualified income (income from activities specified by law for Diia City) should constitute no less than 90%.
Also, it is essential to remember that residents of Diia City cannot be individuals with tax debts, a share in the state's charter capital, unprofitable organizations, etc. Therefore, before registration, a specific check should be conducted to ensure there are no grounds for refusal to register as a resident of Diia City. In our case, there were no such grounds. We registered an LLC, assisted the client in opening a bank account, and created an electronic signature.
In practice, there are two options for submitting an application for resident status in Diia City – submitting a paper application or using an electronic signature for online submission. We electronically filled out the application for resident status in Diia City and submitted a request to the tax authorities for the application of special tax conditions in Diia City. We received a relatively quick decision on granting the client resident status in Diia City and inclusion in the register; however, the decision from the tax authorities took some time.
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Choosing between a full-fledged resident of Diia City or a startup
When registering in Diia City, clients without any restrictions on registration have two distinct options:
- A full-fledged resident of Diia City without any limitations. In this case, the client must comply with all reporting, auditing, and residency conditions in Diia City from the next year onwards. Full-fledged residency is more suitable for established companies or larger enterprises that can meet all the requirements.
- The startup is a company that is not ready to meet all the rules of Diia City regarding the number of employees and average monthly salary has the opportunity until December 31 of the following year to "improve" these criteria. Requirements for annual audits do not apply to such startups in the first year of operation.
It is worth noting that startups also have limitations on the income size, which should not exceed the income limit set for the 3rd group of the unified tax – 1167 minimum wages (UAH 7,818,900 as of 2023).
Therefore, the "startup" mode is more suitable for beginners who are just launching a project but also want to take advantage of the Diia City conditions.
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Registering as a Diia City Resident with the Tax Authority: Key Considerations
A Diia City resident has the option to either remain a taxpayer under the general tax system or choose the special tax conditions designed for Diia City residents. If opting for the special tax conditions, the resident needs to submit the corresponding application to the tax authority either when applying for resident status or within 15 calendar days before the commencement of a new quarter. It's important to bear in mind the following:
- The application must be submitted exclusively in electronic format using digital signature keys.
- There are no publicly accessible registers; hence, residents will receive information through their online accounts.
- The tax authority might not process applications promptly, so it's likely that you will receive a decision on the last day of the specified period.
It is important to note that there are only three reasons for the tax authority to reject an applicant from obtaining taxpayer status under the special conditions of Diia City:
- Lack of registration as a Diia City resident (absence from the Diia City registry).
- Submission of the application beyond the specified deadline.
- The applicant opting for the special tax regime of Diia City more than once in a year.
So, if there are no grounds for rejection, await the decision, and start your operations. This was exactly the situation with our client. We received the tax authority's decision on the last day of the specified period, and the client began operations from the 1st day of the corresponding quarter.
This was a successful case for our company's legal team, who assisted the client in turning his idea of starting his own business into a reality. If you are establishing or already have an IT company and are seeking professional legal assistance, our lawyers can help you by:
- Providing consultations on operating an IT business in Ukraine and abroad.
- Structuring and facilitating the registration of your business.
- Assisting in obtaining resident status in Diia City and taxpayer status under the special conditions of Diia City.
- Offering support with other issues that may arise in the IT business.
By turning to our legal team, you can be confident that your business will receive reliable legal protection and operate successfully even amid constant changes.
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