Ukraine: IT-Business In Ukraine: Tax Benefits

The Ukrainian IT-market is still one of the most dynamic and promising markets among the countries of Central and Eastern Europe due to Ukraine is among the five leading economies in the field of software development. What is more, tax privileges prescribed for by the newly adopted Tax Code of Ukraine IT-business can be even more efficient and attractive for the foreign investors.

The Tax Code of Ukraine, which came into effect on 1 January 2011, became a panacea for many problems of the IT-market players in Ukraine.

Value Added Tax Privilege

The Tax Code of Ukraine resolved one of the long-lasting problems of IT-companies associated with VAT, which is whether transactions on assignment of intellectual property rights (IP rights) to software to foreign assignees are subject to this tax. Existing practice of doing IT-business in Ukraine implies software development in Ukraine by fairly inexpensive but quite high-skilled engineers and subsequent assignment (sale) of the software (IP rights to software) to a foreign parent company or to foreign customer directly.

According to the general rule, specified in s.3 of the formerly effective Act of Ukraine "On Value Added Tax" (VAT Act) and s.185.1 of the currently effective Tax Code, operations on delivery of goods/works/services with the place of delivery within the customs territory of Ukraine are subject to VAT. Both acts provide the rules that must be applied to determine the place of delivery for taxation purposes for different transactions, as well as operations exempt from VAT. According to s.6.5(d) of the VAT Act for the operations on assignment of copyrights, patents and licenses, related rights and trade marks, the place of delivery is determined as the place of registration (incorporation) of the acquirer or its permanent representative office. In other words, Ukrainian software developers could enjoy VAT privilege and not to pay the tax while assigning (selling) software to non-residents. However, the officers of the tax authorities interpreted that provision in a different way and insisted that it covered exclusively the operations on assignment of copyrights but not the operations on software development and sale of software, which, at the tax authorities' opinion, were subject to VAT. As a result of such misinterpretation software and its development were out of the VAT privilege list and IT-companies could hardly get benefits prescribed by the VAT Act (only via long-lasting and expensive court disputes with the tax authorities).

The Tax Code in its s.186.3(a) introduced the new version of the provision previously contained in s.6.5(d) of the VAT Act and clearly specified that for operations on assignment of IP rights, creation upon order and use of IP objects, including based on the license agreements the place of delivery is deemed to be a place where the assignee (purchaser) is registered as a business entity or place of permanent or predominant residency (for individuals).

This made possible to eliminate any further disputes with the tax authorities as to application of the VAT privilege and allowed to save funds previously payable as VAT (formerly and currently until 1 January 2014 the tax rate is 20%; from 1 January 2014 the rate will be 17%).

Staff Expenses Optimization

The laws of Ukraine prescribe for several models to formalize interaction between a company and individuals (employees):

1. Employment, which is based on contracts of employment.
2. Interaction based on private (civil law) contracts made with individuals, who are not registered as individual entrepreneurs (IE).
3. Interaction based on private (civil law) contracts made with individuals, who are registered as IE; this model, in its turn, can be divided into 2 variants:

4. Interaction based on combination of the above models: employment of an individual and cooperation with him/her as IE based on a private contract.

When hiring individual under employment contract an employer (Ukrainian company) undertakes:

• to pay salary under the set time terms and in the amount that is not lower than the minimum salary level (which from 1 April 2011 is UAH 960 (about USD 120), from 1 October 2011 - UAH 985 (about USD 123), and from 1 December 2011 – UAH 1004 (about USD 125)), as well as to make other obligatory payments: vacation payments, sick leave payments, temporary disability payments, pregnancy and childbirth payments, etc.

• to ensure safe working environment.

In addition, under the laws of Ukraine the employer is deemed to be a tax and social security agent in relation to the employees' salary. It is responsible for calculation of taxes on the employees' salary, withholding of taxes and their payment to the budget, as well as calculation, withholding and payment of the single social security fee (SSSF).

As a tax and social security agent the employer is obliged to:

• calculate, withhold and pay the income tax and SSSF to the budget;
• maintain records and submit relevant reports to the State Tax Authorities, Pension Fund and social security funds;
• Bear responsibility for the breach of the relevant legislation: late payment of salary, breach of the procedure of calculation and terms of payment of social security fees, failure to file or late filing of the required reports, etc.

To optimize the taxation and staff expenses Ukrainian companies, as a rule, use another model of cooperation with individuals. The employers make with them private contracts (contracts on works or services) but not labor contracts. Preliminary, the employees are registered as individual entrepreneurs and single-tax payers.

If the company makes private contracts with the IEs, who are single tax payers, the company's expenses will be substantially smaller:

Such model of cooperation with the individuals ("employees") makes a great advantage for the companies of IT-sector.

However, starting from 1 April 2011 Ukrainian companies are not allowed to offset the costs paid for works/services to a IEs, who are single-tax payers, against their corporate income tax liabilities (starting from 1 April 2011 the rate of corporate income tax in Ukraine was reduced from 25% to 23%). But this rule is not applicable to IEs, who conduct activities in the field of informatization, and, therefore, gives Ukrainian IT-companies the possibility to optimize their staff expenses.

The following activity types are included to the list of activities in the field of informatization under the Classifier of Economic Activities DK 009:2005, approved by the Resolution of the State Statistics Authority No.375 dated 26.12.2005:

• advice in the field of informatization (regarding the type and configuration of computer hardware and use of software);
• development of standard software, as well as development and implementation of system software packages, office and game software;
• advice on software development matters and technical aspects of computer systems;
• development of custom software and adaptation of software packages to the specific needs of users;
• development of web-pages;
• provision of services in system analysis, programming and maintenance, as well as other specialized services in the field of informatization;
• data processing, including using the user's or own software, complete data processing, preparation and entry, long-term use of computer equipment that belongs to other users, services on placement of data in Internet;
• activity related to databases;
• repair and maintenance of office computer equipment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.