Forthcoming investment incentives for Ukraine’s IT sector
The Government of Ukraine is taking consistent steps to unlock the potential of Ukraine’s IT sector. Reforms that are being implemented by the Ministry of Digital Transformation of Ukraine are aimed at boosting IT investments.
Newly-announced amendments to Ukrainian tax, labor, corporate, IP and law enforcement legislation will incentivize IT businesses to consider Ukraine as the next destination for their investments.
1. Special corporate income tax (CIT) regime for IT companies
By the draft law dated 10.08.2020 No. 3933-1 “On amendments to the Tax Code of Ukraine and other laws of Ukraine (on measures to stimulate the development of the information technology industry in Ukraine)” and in accordance with the draft law dated 11.08.2020 No. 3979 “On measures to stimulate the development of the IT industry in Ukraine” (hereinafter collectively referred to as “Draft laws on development of IT industry”), special CIT regime shall be implemented for IT companies.
Draft laws on development of IT industry will narrow down the taxation base for 18% CIT to distributed profits only (incl. payment of dividends and operations, which are equivalent to payment of dividends), thus leaving operational profits of IT companies non-taxable.
The CIT taxation base for IT companies will be narrowed down to operations, which include:
- payment of interest in favor of non-resident related persons or non-residents that are registered in “low-tax” jurisdictions;
- provision of non-refundable financial aid to a non-taxpayer;
- provision of financial aid to a related natural person – non-taxpayer or to a non-resident related person;
- provision of financial aid to a related legal entity – non-taxpayer, which remains non-refundable for 12 months;
- provision of financial aid to an unrelated person, which remains non-refundable for 12 months;
- free of charge provision of assets to a non-taxpayer;
- payments made in connection with investing in investment objects (incl. purchase of property) located outside the territory of Ukraine;
- purchase of works, services from a non-resident taxpayer, and/or transfer of property, providing works, services to a non-resident taxpayer;
- payment of royalties in accordance with prescribed limit.
The special CIT regime shall be applicable to taxpayers that meet the special criteria and are included to the IT industry register:
1) taxpayers carry out activities in the IT industry only; and
2) the average monthly salary of taxpayers’ employees is not less than the equivalent of EUR 1,200; and
3) the share of the taxpayers’ costs for remuneration to employees in the total structure of their costs is not less than 70 percent; and
4) the amount of taxpayers’ export revenue from activities in the IT industry is not less than 70 percent of its total income.
Newly-registered IT companies that are not able to meet criteria 2 – 4 above can be included to the IT industry register and become eligible for the special CIT regime in case of:
1) attracting financing from one or more venture funds and/or other institutional investors for a total amount of not less than EUR 500,000; or
2) its or its shareholder(s)’ participation in an acceleration program.
These IT companies shall be required to meet criteria 2 – 3 above within a year after being included to the IT industry register, and the criteria 4 above – within three years after being included to the IT industry register.
2. Special employment taxation regime for IT companies
According to Draft laws on development of IT industry, special personal income tax (PIT) rate, as well as special single social security tax (SSST) rate shall apply to remuneration payed by IT companies for labor of their employees (IT industry employees), namely:
- 5% of a special PIT rate (instead of 18% of a general PIT rate); and
- 5% of a special SSST rate (instead of 22% of a general SSST rate), but not less than USD 95 as of 12 February 2021 (which is an equivalent of two minimal payments required by the law of Ukraine dated 08.07.2010 No. 2464-VI “On the collection and accounting of SSST”).
In order for a taxpayer to benefit from the above incentives, the criteria listed in paragraph 1 of this Article are to be met.
3. Virtual Economic Zone “Diia City”
According to the draft law dated 02.11.2020 No. 4403 “On stimulating development of the digital economy of Ukraine” (hereinafter referred to as “Draft law on digital economy”) virtual economic zone, so-called “Diia City”, will be established.
“Diia City” is a legal regime of e-residence that will provide for tax benefits, more flexible employment regulations, better IP rights protection, application of common law’s best practices with regard to venture capital investments, etc., for a period of not less than 15 years.
Diia City Resident status can be obtained by a company that meets the following requirements:
- the average monthly salary of an employee is not less than the equivalent of USD 1,400; and
- a company has not less than 9 employees; and
- the amount of company’s net income from the sale of products (goods, works, services) for the reporting period is at least 90% of the amount of company’s total net income for the same period; and
- a company carries out exclusively one or more of the following activities:
o marketing of computer games, other software, their translation and adaptation;
o development, modification, testing and support of computer games and other software;
o provision of software products online;
o services for training computer literacy, training in the development, modification, testing and technical support of software;
o conducting marketing campaigns and providing advertising services on the Internet using software developed with the participation of a Diia City Resident;
o research and experimental development in the field of information and communication technologies;
o services related to the circulation of virtual assets, provided that the supplier of such services meets the qualification requirements for suppliers;
o other activities to be determined by the CMU; and
- a company complies with the prohibiting requirements of para 2 of art. 6 of Draft law on digital economy (i.e., a company is not under sanctions stipulated by law, a company has no overdue tax obligations of more than 30 days, etc.).
4. Model of gig-economy employment
According to Draft law on digital economy, Diia City Residents will be able to apply more favorable employment practices, including certain aspects of freelance employment model.
Draft law on digital economy, for instance, will provide Diia City Residents with such privileges as:
- possibility to deviate from general employment law requirements and to determine any of the following terms in the employment contract:
o rights, obligations and liabilities (incl. liability for damages) of the parties;
o conditions of material support and organization of work of an employee (incl. working hours and rest time);
o terms and procedures for payment of remuneration;
o termination provisions (incl. early termination) and others;
- possibility to hire gig-workers without a beforehand concluded written contract by means of accepting a publicly available offer (via Internet);
- exclusion of disputes between employers and gig-workers from regulation of collective labor disputes, etc.
5. IP rights protection for IT companies employing gig-workers
According to Draft law on digital economy, enhanced IP protection for IT companies will be granted by amending art. 440 of the Civil Code of Ukraine.
The property rights to computer programs and/or databases created by an employee in connection with the performance of an employment contract will belong to a legal entity or individual – entrepreneur, which is an employer of such an employee, by default, unless otherwise provided by the contract itself. Therefore, all the property rights to computer programs and/or databases will be automatically transferred to the employer.
6. Access to legal elements of common law system
By Draft law on digital economy, certain legal elements of common law system are going to be implemented to laws of Ukraine in order to promote IT investments. These amendments will include implementing:
- the right to increase charter capital of a limited liability company (hereinafter referred to as “LLC”) via convertible loans mechanism (for venture capital investments);
- the right of LLC and any third party to be a party to a shareholders’ agreement;
- the priority right for claims of creditors that have any preemptive rights to property of debtors – Diia City Residents;
- mechanisms of the employee stock ownership plan (ESOP);
- warranties and indemnities regulations, liquidated damages provisions;
- special conditions for alienation of an LLC shares due to postponing or revoking circumstances, etc.
7. Regulation of agreements with negative obligations
Draft law on digital economy will directly provide for the right of Diia City Residents to conclude non-competition (NCAs), non-solicitation (NSAs) and non-disclosure agreements (NDAs) with their employees and contractors. This will allow business entities with a Diia City Resident status to protect their intangible assets, such as knowledge, skills, information, customer orders, etc.
8. Extra protection from interference
Draft law on digital economy provides for limiting the scope of potential interference in Diia City Residents’ business activities by executive bodies and law enforcement authorities. This includes the following:
- any state control measures shall be applied to Diia City Residents only if sanctioned by a head or a deputy head of a respective executive body;
- any procedural action shall be applied to Diia City Residents in view of a criminal investigation only if sanctioned by a regional prosecutor’s office or a higher prosecution body.
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Yevhenii Shakotko, Head of Legal Affairs and Regulatory Policy Department
Stefan Khrystenko, Legal Specialist of Legal Affairs and Regulatory Policy Department
Information provided in this document is for general guidance only, does not create any legal or other liability in respect of the correctness, completeness, integrity and up-to-datedness thereof. It is strongly recommended to undertake a separate due diligence with respect to all legal entities or business ventures before undertaking any contractual obligations.