Why do Ukrainian IT companies need Diia City?
On February 8, 2022 special legal regime Diia City, created especially for IT companies, was launched in Ukraine. Diia City is a new legal regime for Ukrainian IT business with its own advantages and disadvantages.
Today, the majority of IT companies, working in Ukraine, have already got closely acquainted with the new service and try to find out if it is beneficial for them to use Diia City and why. Our lawyers have analyzed the main innovations of Diia City for IT-business.
Criteria for obtaining Diia City residency status
General criteria for obtaining residency status
Acquisition of Diia City residency is allowed to Ukrainian legal entities that meet all of the following criteria:
- The field of work is IT. That is, programming, software development or computer games;
- For employees or gig-specialists there is a remuneration not less than 1,200 euros per month;
- At least 9 employees and gig-specialists must be involved in the project;
- Qualified income from activities in the field of IT and other areas defined by law is not less than 90%.
In addition, the following legal entities cannot be residents of Diia City:
- those registered outside of Ukraine;
- non-profit organizations;
- legal entities that have tax debts in the amount exceeding 10 minimum wages for more than 30 days;
- those engaged in gambling activities;
- legal entities that have violated the requirements of the legislation on disclosure of information on the ultimate beneficial owner of the legal entity.
- other criteria clearly stated in the conditions for acquiring residency in Diia City.
The procedure for obtaining Diia City residency is not complicated. In order to obtain Diia City residency, an application for Diia City residency must be submitted to the Ministry of Digital Transformation. The application can be submitted both electronically through the Diia City website and in writing.
In case of filing in writing, it is necessary to properly and correctly draft and complete the application, add a power of attorney for the representative and, in case you wish to acquire Diia City resident income tax status, submit the corresponding application. It is important to show the information in the application accurately and correctly so that you are not denied registration and are comfortable working in Diia City.
Diia City residency can easily be lost due to non-compliance with legal requirements. As a general rule, a legal entity is granted Diia City residency until December 31 of the next calendar year after the application is filed. If the legal entity does not meet the criteria by then, Diia City residency can be lost.
In addition, it’s important to evaluate the possible benefits or risks of joining the residency, and prepare for the process at a pace that’s comfortable for you. Our lawyers can help you with this issue.
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Benefits of becoming a resident in Diia City
Taxation of IT companies with Diia City.
Undoubtedly, the most interesting for business owners is the issue of taxation, because Diia City is an alternative to the usual, in Ukrainian realities, business model of IT companies working with sole proprietors. During registration, a legal entity has the right to choose taxation as an income taxpayer resident of Diia City. Such tax regime provides for:
Income tax (in the case of the income tax under special conditions) – 9%. However, according to Article 135.2 of the Tax Code of Ukraine, the rate of 9% is applied to determine the tax base, which is defined as the amount of:
- dividend payments;
- payments of interest in favor of non-resident related persons;
- provision of financial assistance to non-resident of Diia City;
- gratuitous provision of property to a non-resident Diia City, a taxpayer under the special tax regime;
- payment of royalties in amounts exceeding the limit, etc.
In addition, for the taxation of Diia City residents one should take into account the requirements for controlled transactions.
For Diia City residents a 0% rate applies on dividend payments to participants of legal entities resident in Diia City, if dividends are paid not more than once in 2 years.
Salaries, payments under gig-contracts and royalties for created works are taxed at the rate of 5% if the amount of such payments does not exceed the equivalent of 240,000 euros per year. If income exceeds 240 thousand euros per year, one will have to pay 18% personal income tax. In addition, you must pay a single social contribution at the rate of 22% of the minimum wage and 1.5% of the military fee.
If you need more information about the taxation of Diia City residents, please contact our lawyers.
Employment under Gig-Contracts.
Gig-contracts are a special form of contract that combines elements of an employment agreement and a civil law contract. A gig-contract may include the following provisions to regulate:
- non-disclosure of confidential information;
- expansion of the employer’s right to control the quality and process of the work of the gig-spesialist;
- property rights to the created code or other objects of intellectual property rights, including under the contract they can automatically pass to the employer;
- payment for the work performed by a gig-specialist, which can be determined in foreign currency. Moreover, the payment procedure can be established by the contract (monthly, quarterly, project or hourly work);
- absence of compulsory additional social guarantees for employees, established by the Labor Code, such as additional vacations, employment without a probationary period for some categories of employees, etc;
- possibility to establish the procedure and terms of termination of the gig-contract;
- duration of the annual paid break of 17 business days, if longer duration of the break is not specified in the gig-contract.
In general, gig-contracts are attractive to employers because they allow them to determine the working conditions of an employee, somewhat differently than the conditions specified in the Labor Code, and not to be afraid of inspections by regulatory agencies, as in the case of working with IТ specialists that are sole proprietors.
Additional benefits provided by Diia City:
- possibility to employ foreigners to work in Ukraine without obtaining a work permit.
- possibility for a legal entity to exercise the functions of the management body of the company.
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Dia City - profitable or not?
Despite the above criteria and the relative ease of acquiring Dia City residency status, IT businesses, when considering the issue of acquiring resident status, should calculate whether it is beneficial for them:
change certain established processes in the company;
change approaches to personnel, legal and financial policies for residency in Diya City.
There is no unequivocal answer to this question, but the "pluses" are obvious:
0% on the income of individuals as dividends accrued by the resident company, provided they are paid no more than once every 2 years;
tax discount: the amount spent on the purchase of a stake in a Ukrainian startup is deducted from the total taxable income;
low tax rates - 9% on "withdrawn capital" or 18% on profit, which is an opportunity to invest in the development of your own business;
independently choose the employment format: in addition to the typical formats of KZpP or cooperation with sole proprietorship, you can sign a gig contract available only to Dia.City residents;
the procedure for legalization of foreigners with whom a gig contract has been concluded has been simplified;
the property rights of the Dia City resident to intellectual property objects are secured;
the employer no longer has the risk that his relations with sole proprietorships will be recognized as labor and huge fines will be added.
Each IT company has its own peculiarities of work. Some companies operate according to the cost principle, that is, the company does not concentrate profits within Ukraine. Other companies, on the contrary, try to leave the earned funds in Ukraine. There are hybrid options, when sole traders receive income from a non-resident, etc. Such conditions are difficult to quickly adapt to the requirements of Dia City.
Our lawyers have the necessary level of knowledge and competence and will be able to help your business at all stages: from due diligence of your activity and providing recommendations, to obtaining resident status and business customer service.
Today, residency in Dia City is not mandatory for IT companies. But more and more of our Clients choose this legal regime for the operation of their companies.
255 Ukrainian legal entities have already been registered as residents of Dia City, among them are major players of the Ukrainian IT market: Reface, Roosh, Monobank, MacPaw, EPAM Systems, Samsung, Rozetka, Luxoft, etc.
If you have made a decision to acquire residency status, or you need to analyze the advantages and disadvantages of residency specifically for your business, or if there are difficulties with obtaining residency, our lawyers are always ready to help.
The cost of legal consultations and services for IT companies can be found here.
Didn’t find an answer to your question?
Service packages offers
- providing advice on obtaining the status of a resident of Diia City;
- providing advice on taxation of Diia City residents;
- provision of advice on employment of employees, work with sole proprietorship and gig contracts;
- recommendations of a lawyer regarding the organizational and legal form for a resident of Diia City, a package of documents and necessary actions for obtaining residency.
- providing advice on obtaining the status of a resident of Diiia City;
- providing advice on taxation of Diiia City residents;
- provision of advice on employment of employees, work with sole proprietorship and gig contracts;
- assistance in forming a package of documents for obtaining Diiia City residency;
- preparation of a gig contract template and signing them with employees;
- assistance in confirming the status of a resident of Diiia City, including for startups.
- providing advice on obtaining the status of a resident of Diia City, tax features and employment of employees for residents of Diia City;
- preparation of documents for obtaining the status of a resident of Diia City, including for a startup, organization of registration as a resident of Diia City;
- study of risks, prevention of grounds for cancellation of residency in Diia City;
- assistance in the legalization of foreigners on the basis of an employment permit or on the basis of a concluded gig contract, in accordance with the chosen model of wage taxation;
- obtaining an employment permit or preparing a draft gig contract;
- preparation of documents and organization of application for D visa, filling out the electronic visa application form;
- preparation of a package of documents and organization of submission of a permit for temporary residence in Ukraine.
Registration of each subsequent employee - 200 USD.