The Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” established virtual economic zone, the so-called Diia.City that combines favorable tax conditions with effective tools to allow companies to build a transparent corporate structure, attract foreign investment more easily, and use additional mechanisms to protect intangible assets.
“Diya City” is a legal regime of e-residence that will provide for tax benefits, more flexible employment regulations, better IP rights protection, application of best practices of Law of England and Wales with regard to venture capital investments, etc., for a period of not less than 25 years.
The following incentives are available for Diia.City residents, in particular:
- a special corporate income tax regime: a Diia.City resident may choose to pay 9% withdrawal capital tax instead of 18% corporate income tax payable on general basis;
- 0% on the income of individuals as dividends accrued by a resident company, provided that they are paid no more than once in 2 years term;
- tax rebate (with personal income tax) on the amount of investments in Ukrainian startups: personal income tax is paid not on the entire amount of profit, but only on the excess amount of investments;
- a new form of cooperation between Diia.City residents and IT specialists: By working under “gig-contracts” IT specialists pay 5% PIT and are allowed to include such provisions as employees’ non-disclosure obligations, non-competition, remuneration in a foreign currency, which is currently prohibited by labor law;
- venture investment tools: right to increase charter capital of a limited liability company via convertible loans mechanism; mechanisms of the employee stock ownership plan (ESOP); warranties and indemnities regulations, liquidated damages provisions etc.
Requirements for entering the “Diia City” regime are the following:
- 9+ employees and/or gig-specialists;
- an average monthly salary of employees is not less than the equivalent of EUR 1,200;
- 90%+ of an IT company’s total net income and royalties consists of the “qualified income” (income obtained as a result of economic activities in the IT sphere).
- IT company carries out, among others, one or more of the following activities:
– software development and testing, including games;
– publishing and distribution of software, including SaaS;
– teaching computer literacy, programming, testing, software technical support;
– digital marketing and advertising via software developed by Diia City residents;
– R&D in IT and Telecom;
– providing services related to the virtual assets flow etc.
An IT start-up* can obtain a status of “Diia City” Resident even if it only meets the requirement of 90% of an IT company’s total net income consisting of the “qualified income” (income obtained as a result of IT activities).
*A company shall be deemed a “start-up” if it is registered not earlier than 24 months before the date of filing an application and its total annual income does not exceed the threshold for third group of unified taxpayers (1167 minimum wages, approx. 7,5 mln hrn for 2022) in the calendar year, prior to the calendar year, in which a company obtained a Diia City Resident status
However, while martial law is in force, companies will not be deprived of the status of residents of Diia City, as well as from entering the regime, even if they do not meet the above criteria.