Diia City is a special tax and legal status for Ukrainian IT companies. It was approved in order to establish proper and easy tax and legal status for companies working in the following spheres: IT, R&D, and other services and that hire programmers, engineers, software developers, and IT specialists in Ukraine. The company that is registered as a Diia City resident can save more than 30% of payroll taxes. This special legal and fiscal regulation allows for establishing the proper functioning of the mentioned companies in Ukraine. The status of a Ukrainian company that is registered as Diia City resident is regulated by the Law of Ukraine “On stimulating the development of the digital economy in Ukraine” (hereinafter – Diia City Law). Companies that are registered in Ukraine (see more about company formation in Ukraine) and which are providing IT, programming, game development, modification and testing of computer programs, research and development (R&D) or research and technological development (RTD)б cybersecurity, and others (according to the list below). Not to list every time hereinafter we will call companies which are registered as Diia City residents (and conducting a certain type of activity) are named as an IT company.
What are the advantages of Diia City residency?
The first and the main advantage is that it helps to save a lot of payroll taxes, which are pretty high in Ukraine (considering that it is a developing country). Ordinary company has to pay around 41,5 % of different salary taxes in Ukraine. It includes 1,5% war tax, 18% individual income tax and 22% social security (also called pension tax). So, with a salary of 65,000 hryvnias, the amount of taxes will be the following:
Employee’s net salary – 52 325.0
18% individual income tax – 11 700.00
22% social security tax – 14 300.00
1,5% war tax – 975.00
But in case if Ukrainian IT company is registered as a member of Diia City, payroll taxes are calculated based on minimum wage (it is the minimal amount that shall be paid to the employee per one calendar month of work), which is determined by the government of Ukraine. Therefore, with a salary of 65,000 hryvnias, the amount of salary taxes for the employee of the company that is a Resident of Diia City will be the following:
Employee’s net salary – UAH 61 652.50
5% (instead of 18%) individual income tax – UAH 3 250.00
22% social security tax – UAH 1 430.00
1,5% war tax – UAH 97.50
As you can see, this special tax regime gives IT companies a huge advantage and helps them to avoid very high Ukrainian salary taxes. At the same time, there is a requirement that the salary (per one month) of such an employee shall be not less than the equivalent of EUR 1 200.00 and not more than EUR 20 000.00. Currently, most of IT companies in Ukraine (which are not residents of Diia City) are working under the following tax and legal conditions.
The second advantage is that an IT company has the ability to cover the rights of intellectual property. It can be mentioned in the employment agreement between an It company and a specialist that all the results of the work (as well as all the solutions, know-how, developed programs, etc.). Consider that the employee of a Ukrainian IT company is called GIG-specialist and the employment contract is called GIG-contract. Intellectual property for the object created by the gig specialist in connection with the execution of the gig contract belongs to the resident of Diia City (to an IT company), which is considered as the customer under such gig contract unless otherwise provided by the gig contract. So an IT company has a legal solution to protect the intellectual property created during the performance of work by an employee.
The third advantage is much more flexible employment legislation. There are special definitions in the Employment Code of Ukraine for GIG-specialist and for GIG-contract and it is mentioned that relations between an IT company and GIG-specialist are regulated by the Law and are much more flexible than the general labor legislation. So there are particular rights and duties of the parties of GIG contract which are regulated by Diia City law, namely
- the procedure for terminating GIG-contract is mentioned in such contract;
- any party can cancel GIG-contract at any time but in accordance with such contract;
- terms of GIG-contract may be contrary to the labor code;
- GIG-contract is concluded based on Diia City law.
At the same time, the gig contract itself can be very flexible. It can contain responsibilities of the parties, Non-disclosure requirements, non-disclosure requirements, penalties, etc.
Consider that it is cot compulsory for a Ukrainian IT company to have a GIG contract with all the employees. Administration, management, staff members, and other workers can have an ordinary employment contract.
One more advantage is the guarantee that the duration of this special tax and legal regime for IT companies in Ukraine will remain for 25 years starting from the date when the first resident was accepted to Diia City (February 2022). So companies will have confidence that the rules will not be changed anytime soon.
What are the requirements to become a resident of Diia City in Ukraine?
As it was mentioned above, only Ukrainian companies can become residents of Diia city. The company shall work in the following spheres:
1. computer programming, consulting on informatization, and computer equipment management activities, namely:
- development, modification, testing, and technical support of software, including computer games; other work at all stages of the software development life cycle, including business subject analysis, software specification development, user interface development, and design, software solution architecture development, programming, quality control, technical documentation development, documentation use development, and software adaptation ;
- development of structure and content and/or development of a system of commands required for the creation and execution of software – system software (including updated and updated), applications (including updated and updated), including computer games, databases, websites;
- software configuration, ie modification and configuration of existing software add-ons, thus, it functioned within the information (automated) system of clients and end-user devices, in particular, configuration of software developed by third parties;
- planning and design of integrated computer systems that combine hardware, software and communication technologies, including consulting and training of users of such systems, other consulting on the implementation and use of software, including third parties;
- management and operation of customer’s computer systems and/or data processing facilities in such a way that they operate within the customer’s information (automated) system;
- other development, modification, testing and technical support of computer games, including design and content for computer games, translation and adaptation of computer games, the composition of movies and videos as elements of computer games, specialized design activities elements of computer games, activities in the field of photography for computer games, individual artistic activities for the creation of elements of computer games, services for the decoration of elements of computer games;
2. development of computer games, as well as other software, including:
- publication of standard software (system or software), in particular its or adaptation for own account: operating systems, business, educational, entertainment, and other software applications;
- publication of computer games for any of their platforms, including translation or adaptation for own account;
- publishing elements, updates, additions, and extensions of software functionality, including computer games;
- granting and transferring intellectual property rights to the software, including computer games, and its components;
3. providing software products, including computer games, online and providing web services with the delivery of software applications, including the distribution of copies (copies, copies) of software in electronic form, including computer games, its elements, updates, additions, and extensions of functionality;
4. educational activities in the field of information technology, including conduction of higher, professional advanced, and vocational education in such specialties as computer science, information systems, and technology, computer engineering, cybersecurity, and science, as well as providing other types of education, and: computer literacy (digital literacy) training, which includes digital literacy training services, namely the development, modification, testing and technical support of software, which include computer games, business analysis training, for development purposes, modification, testing and technical support of software), construction of graphical interfaces, organization of control processes, system administration, project management, documentation development;
5. data processing and related activities, except the provision of infrastructure for data processing and hosting (hosting) and hosting services (hosting), and the activities of web portals, including:
automation of processing of the data received from clients, automation of the developed specialized reports on the basis of the data received from clients, including the account of such data (the process of semi-automatic analysis of large databases on a search of useful points);
managing websites that provide Internet search and/or use search engines to create and maintain large databases of Internet addresses and content in a searchable format;
management of other websites that function as portals on the Internet, such as media sites that periodically update information content, streaming, and other platforms;
6. research and experimental development in the field of natural and technical sciences on information and information and communication technologies;
7. conducting marketing campaigns and providing advertising services using software developed with the participation of a resident of Action City, on the Internet and/or on users’ devices;
8. activities of organizers of e-sports competitions, e-sports teams, specialized computer centers and/or clubs designed for e-sports competitions, as well as studios of e-sports competitions broadcasts;
9. the activities of the service provider related to the circulation of virtual assets;
10. providing cybersecurity of information and communication systems, software products and information processed in; development and implementation of organizational measures, software and hardware-software products designed to prevent cyber incidents, detect and protect against cyber attacks, eliminate their consequences, restore the sustainability of communication and technological systems (networks); processing and analysis of data on the circumstances of the cyber incident and its consequences, establishing the preconditions that led to it, providing appropriate recommendations; planning and design of integrated computer systems that combine hardware, software and communication technologies designed for secure processing of information (data); providing advice on cybersecurity (cybersecurity) of communication systems and software (products) that ensure the functioning of the client’s IT systems; provision of services for operation and maintenance of communication equipment, software designed to ensure cybersecurity of communication and technological systems (networks); conducting research and experimental development in the field of cybersecurity;
11. research and development; testing of technologies, devices and systems of robotics using computerized control systems.