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Law on the Functioning of Diia City Tax Regime Has Been Adopted
On December 14, the Verkhovna Rada adopted the Law “On Amendments to the Tax Code of Ukraine to Stimulate the Development of the Digital Economy in Ukraine” (Bill No. 5376), which aims to promote the formation of a competitive sphere for technology and innovation development in the Ukrainian economy. The Law comes into force on January 1, 2022.
According to the authors of the Bill, such actions are timely for the state, given the rapid growth rate of the technological industry. According to the Ukrainian IT company N-iX, information and communication technologies (ICT) rank third in terms of exports of services, which is one-fifth of all exports of services in Ukraine. Revenue in the ICT sector is growing by 26% annually, the number of companies in this industry exceeds 4,000. The number of specialists employed in IT professions reached almost 200 thousand in 2020.
Basic Principles of the Law Concerning Taxation of the Digital Industry
The Law provides a number of tax incentives for the IT industry and the improvement of taxation in the digital economy in Ukraine. The combination of all these provisions forms a special legal regime called “Diia City”, which is regulated by Law № 1667-IX “On Stimulating the Development of Digital Economy in Ukraine”.
Residents (legal entities that use the Diia City regime) are divided into two groups: the first one pays corporate income tax on special terms (at a rate of 9%), the second one applies the current concept of accrual and payment of income tax at a rate of 18%.
There are also provisions on liability for legal entities that have benefited from the preferential treatment without complying with the criteria for Diia City residents.
The Law introduces:
◎ a special taxation regime for Diia City residents ‒ IT companies meeting the requirements of Law No. 1667-IX, which will be included in a special register;
◎ a special taxation regime of certain incomes of employees of Diia City and engaged gig specialists ‒ experts who perform works (provide services) acting as contractors on the basis of gig contracts concluded with a Diia City resident acting as a customer.
Diia City Tax Rates
Personal income tax at a rate of 5% will be taxed on:
● salaries of employees of Diia City residents;
● remuneration of gig specialists under gig contracts concluded with Diia City residents;
● royalties for the creation of a work for hire and the transfer of rights to works for hire.
In addition, a single contribution to the compulsory state social insurance is established in the amount of:
● minimum insurance premium ‒ for employees of Diia City residents;
● 22% of the size of the single contribution base, calculated on the basis of the provisions of the gig contract ‒ for gig specialists working with a Diia City resident.
Starting from 2024, newly created residents of Diia City who opt for paying income tax on special terms will calculate the share of the value of property (works, services) purchased from single tax payers on the basis of the Report on Financial Results for the current annual reporting period.
Recent Effective Updates
After consideration of the Law in the second reading, the following amendments were made.
⇒ The Law no longer provides for restrictions on the salaries of specialists limited by EUR 240 thousand per year. If a specialist receives an annual salary in excess of this amount, all income above this limit is taxed by an additional 18% of personal income tax.
⇒ A transition period has been set for restrictions on working with single taxpayers: from 2024, such expenses should not exceed 50%, and from 2025 ‒ 20%.
⇒ Companies that choose to follow the general taxation system (i.e., 18% of income tax instead of 9%) and whose annual turnover does not exceed UAH 40 million can work jointly with individual entrepreneurs without restrictions.
⇒ The Cabinet of Ministers will have three months to develop a mechanism for compensation of funds paid to taxpayers in connection with the exercise of their right to a tax rebate if a personal income tax payer pays it to the budget of another state.
In accordance with Law № 1667-IX, the state guarantees to maintain the operation of the Diia City legal regime for a period of 25 years. Acquisition of the Diia City resident status is voluntary.