Digital economy in Ukraine. To be or not to be!
By: Maksym Prokhorov
Tags: Ukraine, Digital, Diya, Agile, Software

What’s the deal with Lyft?

Lyft is now available to about 95% of the US population, and also operates in Canada and Europe. More and more people use this transportation service. Lyft’s transport network brings together car, bike, scooter and transit rental in one app.

“Ukraine has one of the fastest growing IT markets in Europe. Now more than 220 thousand IT specialists work in Ukraine. It was the talent of our engineers and the rapid digitalization of our state that contributed to Lyft’s decision to open an R&D center in Ukraine. We are proud that innovative companies like Lyft recognize the high qualifications of Ukrainian IT specialists and a highly developed IT sector. We want more and more technology companies to enter Ukraine. That is why we are launching Diya City — a special legal regime and one of the best tax systems for IT in the world ”, — quotes the government portal Mikhail Fedorov, Deputy Prime Minister — Minister of Digital Transformation of Ukraine.

Lyft is considering joining Diya City, as this will allow it to conduct business in a comfortable, understandable environment and scale its presence in Ukraine.

“The special regime of Diya City will make Ukraine an attractive state for doing business. Companies will receive space for development and a low tax burden. In addition, such tax mechanisms will be beneficial for both Ukrainian and international IT companies. We will be glad to see Lyft among the residents of Diya City, ”added Alexander Bornyakov, Deputy Minister of the Ministry of Digital Industry.

According to the government portal, now the IT sector in Ukraine is organically growing by 20–30% annually. However, after the launch of the Diya City project, the number of jobs is expected to increase to more than 450 thousand, as well as the growth of the IT industry from $ 6 billion to $ 16.5 billion in 2025.

New Diya City Law: Highlights

The Law of Ukraine №1667-IX “On Stimulating the Development of the Digital Economy in Ukraine” took effect on August 14, 2021, which means a new life starts for IT companies. What it will be and what exactly the adopted document will affect, we will analyze further.

This document creates a “legal regime for Diya City” for the participants, within which they will have additional opportunities to work in the field of IT, in particular with respect to residency, taxation, cooperation with IT specialists. Also, the law introduces new concepts and conditions, for example, a gig contract, a gig specialist, enshrines the provisions of the NCA (Non Compete Agreement), highlights the specifics of regulating transactions involving residents of Diya City and corporate governance of residents of Diya City.

There are certain provisions of the law that will take effect from mid-February 2022. In particular, those that relate to the work of service providers related to the circulation of virtual assets as a type of activity.

The Ministry of Digital Transformation (Ministry of Digital Transformation) will regulate and monitor compliance with legal requirements. The Diya City regime can operate for an unlimited time, but not less than 25 years from the date of the first registration. Accordingly, for this period, the state guarantees stable conditions for the legal regime of the participating company. Changes can only take place in the direction of softening the conditions.

In order for the law on “Diya City” to harmoniously fit into all Ukrainian legislation, it is necessary to coordinate it with a number of other documents. At the same time, not in all aspects it will now be possible to do this, since some reforms have not yet taken place, for example, the creation of a specialized court on intellectual property.

Who is the resident of “Diya City”

Whether to obtain the status of a resident of “Diya City”, each IT-company decides on its own. If you want to take on additional responsibilities as a participant in this regime, you need to submit an application to the Ministry of Digital Affairs.

A resident will be a legal entity entered in the register of “Diya City”, which will allow using the special features of the preferential tax regime, concluding agreements (gig contracts), etc. Only companies registered in Ukraine that meet the following criteria are allowed to obtain resident status:

• work in the IT field, which must be confirmed by the statute and the corresponding KVED (the full list is defined in part 4 of article 5 of law №1667-IX);

• the average salary / monthly fee for resident specialists should not be lower than the equivalent of € 1,200;

• the number of involved IT specialists — at least 9 people;

• activity in IT should be at least 90% of the total income for the calendar year (how well this indicator is maintained is determined by an independent audit).

Cannot become residents of “Diya City”, for example, companies that have:

• 25% of the statutory capital belongs to the state;

• there is a tax debt;

• there are restrictions regarding some ultimate beneficial owners, etc.

The regulator makes a decision on residence within 10 working days, if there are no precedents for refusing or returning an application. Within six months from the date of obtaining the status of a resident, the company submits the first reporting document with information on compliance with all the requirements defined for residents. And no later than June 1 of the year following the reporting year, it is also necessary to submit an annual report.

Features of the tax regime

By becoming a resident of Diya City, a company can choose a special tax regime. There are such options:

1. The rate of 9% tax on some types of operations — dividends, interest payments, royalties, return of the contribution to the founder, etc.

2. The rate of 5% for personal income tax, which will be deducted from the wages of workers and / or the remuneration of the gig specialist, as well as 1.5% of the military tax.

3. Unified social contribution:

3.1 employees — in the amount of the minimum insurance premium (22% of the minimum wage);

3.2 gig specialists — 22% of the remuneration under the gig contract, but within the minimum and maximum ERUs.

These and other features of taxation of residents of “Diya City” are spelled out in the bill № 5376 “On Amendments to the Tax Code of Ukraine regarding the stimulation of the development of the digital economy in Ukraine.” And so far it has only passed the first reading.

Who and how can cooperate with a resident

The resident company “Diya City” has three options for attracting IT specialists to work. So we can conclude:

1. Employment contract. And then the employee is subject to the rights and obligations provided for by the labor legislation of Ukraine (vacation, sick leave, working hours and everything else enshrined in the labor code).

2. An ordinary contract for the performance of work or the provision of services. They are not uncommon in collaboration between companies and entrepreneurs.

3. Gig contract. The new form of agreement, which is defined in the law as a civil contract, in accordance with it, the gig specialist undertakes to perform work or provide services provided by the resident of “Diya City” (acts as the customer). In turn, the resident pays for the work of the gig specialist and provides him with all the conditions for completing the tasks.