In this article you will find the overview of a new Ukrainian legal and economic regime for IT industry players: its key features, requirements for potential residents, new types of contracts and special tax conditions.
Key words: Ukraine, Special Economic Zone, Diia Сity, IT, Gig-contract, Gig-specialist.
In autumn 2020, the President of Ukraine announced the creation of the project "Diia City" ("DC"). The project is intended to build a special legal and economic zone for the creative industry, in which the Ukrainian high-tech sector would be able to fully realize its potential and make Ukrainian IT business competitive in the international arena1. In August 2021, the new law "On Stimulating the Development of the Digital Economy in Ukraine" No. 43032 (the "Law") was signed by the President and сame into force.
By implementing such legal regime, Ukraine pursues the following goals:
- attraction of investments;
- development of digital infrastructure;
- attraction of talented workers from around the world;
- stimulation of the domestic innovative products creation (startups and product companies).
The Law establishes the basic principles of operation of this act, which should promote increased stability and will be considered by national and foreign courts while resolving possible disputes, for instance:
- freedom of activity - all DC residents have the right to conduct business independently.
- non-interference - non-interference of the state in the activities of the DC residents, if such activities are carried out within the legislation of Ukraine.
- presumption of legality DC residents' actions - interpretation of the applicable legislation in favor of DC residents, in case the law or another normative legal act provides for ambiguous interpretation of DC residents' rights and obligations.
- stability - the state guarantees the preservation of the DC legal regime and stability of its conditions within 25 years from the date of the first resident entry in DC Register (electronic register that contains information about legal entities that have or had the status of the DC resident).
- the formal nature of the procedure for acquiring the status of the DC resident - the absence of requirements for obtaining special permits, licensing or implementation of state supervision (control) measures for the submission and consideration of applications for the DC resident status.
- voluntary participation in the DC - non-allowability of direct or indirect compulsion to obtain the status of the DC resident.3
HOW TO BECOME A DC RESIDENT?
To become a DC resident, a legal entity should be: (i) registered under the legislation of Ukraine; (ii) meet the criteria set by the special legislation on DC, (iii) included in the DC Register and (iv) report on compliance with the applicable criteria for every three months while being the DC resident.
The companies engaged in the following "digital" activities can be DC residents:
- computer programming, informatization consulting, computer equipment management activities;
- developing of computer games and other software;
- providing software products, including computer games, online games and providing web services for the distribution of software applications;
- educational activities in the field of information technology, including the provision of higher, professional higher and vocational education in such areas as computer science, information systems and technologies, computer engineering, cybersecurity, data science;
- data processing and related activities, other than the provision of data processing and hosting infrastructure and hosting services, and web portal activities;
- research and experimental development of natural and technical sciences in relation to information and communication technologies;
- conducting marketing campaigns and providing advertising services using software developed with the participation of the DC resident, on the Internet and /or on users' devices;
- activities for the organization of e-sports competitions, e-sports teams, specialized computer centers and / or clubs designed for e-sports competitions, as well as studios for broadcasting e-sports competitions;
- activities of a service provider related to the circulation of virtual assets;
- ensuring cybersecurity of information and communication systems, software products and information processed in them;
- activities for design (construction), research, testing of technologies, devices and systems of robotics with the use of computerized control systems ("Digital Activities").
The criteria for obtaining the status of the DC resident for existing Ukrainan companies are as follows:
- performing one or more Digital Activities, as defined in the DС resident charter or by the information in the register of legal entities;
- the amount of income from the Digital Activities received in the first three calendar months following the calendar month in which the legal entity acquired the status of the DC resident is not less than 90 percent of its total income for such period, and the amount of income from the Digital Activities received in each calendar year of being the DC resident, is not less than 90 percent of the total income of the legal entity for the same period;
- the average number of employees and gig- specialists at the end of each calendar month, starting from the month when the status of the DC resident has been obtained, should be at least nine people;
- the amount of the average monthly remuneration of the DC resident employees and gig specialists, starting from the month when the status of the DC resident has been obtained, is not less than the equivalent of EUR 1,200 ;
- absence of "negative" criteria.4
GIG - CONTRACT
Introduction of a new concept of "Gig - contract" ("GC") is a special form of involving specialists, which combines the features of an employment and a services contract. In other words, it is a system of work when professionals are not hired, but are invited to the specific projects, where theу perform tasks within specified timeframes. Such form allows to preserve the flexibility of civil law relations, eliminates the risk of the reclassification of the relations as labor ones, and provides social guarantees to the professionals.
INTELLECTUAL PROPERTY RIGHTS
DC regime eliminates certain inaccuracies regarding the intellectual property rights to computer programs created by IT specialists. According to the Law, the property rights to computer programs and databases should belong to the employer or a customer, unless agreed otherwise in an agreement.5
FEATURES OF AGREEMENTS REGULATION
The Law introduces the possibility of signing non-compete agreements ("NCA"). It is a contract under which the specialist undertakes to refrain from competing against the DC, is repayable and is made in writing. The contract must specify: the term of the obligation, the territory of distribution, an exhaustive list of competing activities and / or persons, material benefits that the specialist receives in return for the obligation to refrain from competing.
The Law also allows the DC residents to sign a non-disclosure agreement ("NDA") between with its employees. that the NDA can be repayable or not repayable. The NDA has to specify the term and define the information which is covered by such NDA.
In case of violation of the terms stipulated in the abovementioned agreements by an IT specialist, the latter will have to pay a predetermined amount of fine and compensate the damegas to the DC resident, if any.
ELEMENTS OF ENGLISH LAW IN UKRAINIAN LEGISLATION
The Law introduces the following concepts of English law and international corporate law:
- Convertible loan. An investor providing a loan to a project company (startup) may be able to return upon its request the invested funds in the form of a share in the charter capital of the company;
- Option agreement. The Law allows to enter into option agreements that should contain certain mandatory provisions regarding the shares of in the charter capital of the DC resident;
- A tool such as Liquidation Preferences provides preferences for creditors and the members of the DC resident in the event of its termination or other circumstances;
- Liquidated Damages. It is compensation provided by an agreement to which the DC resident is a party, or an agreement regarding the share in the authorized capital of the DC resident, which may require one party to pay the other party a compensation of expenses incurred by such party or a third party in connection with the performance or non-performance under such agreement, or circumstances that are not related to the breach of obligations by the party that undertakes such obligations, including costs incurred in connection with the inability to perform the obligation or perform certain actions;
- Warranties & Indemnities provide protection to investors through the institution of compensation for losses, if the state of the company was not as promised, and some defects were not reported to the investor before the agreement.
- It will mean the possibility of establishing compensation in favor of the party that relied on false assurances and the possibility to oblige the other party to pay compensation in the event of occurrence of the circumstances stipulated by the agreement which are not related to breaching of obligations.
- Such compensation shall be paid regardless of the intent and fault of the person who undertakes to pay the compensation.
- Outsource management. The management functions are performed by a separate management firm, which can be, for instance, a professional development team, it will help the investors, startups, incubators to perform more comfortable control on the management processes.
SPECIAL TAX CONDITIONS
Specific taxation regime for the DC residents will be implemented after the Draft Law No. 53766 will be adopted and will enter into force. Currently, this draft law has passed the first reading and is being prepared for the second (final) reading. The Draft Law No. 5376 introduces the following tax regime:
- 5% personal income tax (in comparison with 18% under a general basis).
- 2% single social security tax (in comparison with 22% under a general basis).
- 1.5% military tax.
Taxes on the company and its members
- 9% on "withdrawn capital" or 18% on profit (the object of taxation is chosen at the discretion of the company).
- 0% on the income of an individual received as dividends if they were not distributed for two or more years.
To stimulate "angel investments"
- tax allowance (from personal income tax) on the amount of investment in Ukrainian startups.
- 0% on the income of an individual from the sale of shares in a startup if it's owned for more than a year.
Diia City is not another law for IT professionals, it is a complex of instruments for changes in all Ukraine economy. It is a huge attraction instrument for investors. If you have an IT business or want to create an IT startup in Ukraine, the DC is the best place where your company should be registered. The state-guaranteed most-favored-nation regime, flexible conditions of employment, the possibility of implementation of the features of English contract law and best corporate practices, as well as reduced taxation will help successfully work in Ukraine and be highly competitive worldwide.
1. 2021 in Ukraine will beсome the beginning of the creation of a digital state. https://kharkivoda.gov.ua/news/105342
2. Law of Ukraine "On Stimulating the Development of the Digital Economy in Ukraine". https://zakon.rada.gov.ua/laws/show/1667-20#Text
3. Art. 2, p. 4 of the Law of Ukraine "On Stimulating the Development of the Digital Economy in Ukraine".
4. "Negative" criteria mean certain restrictions towards potential DC residents such as: to be registered under the laws of Ukraine; not to be a non-commercial organisation; not to be owned by a Russian resident; not to undergo liquidation or bankruptcy procedures; not be involved in gambling activities and others.
5. Art. 429 of the Сivil Code of Ukraine.
6. Draf Law of Ukraine "On Amendments to the Tax Code of Ukraine regarding Stimulation of Development of Digital Economy in Ukraine" http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=71663
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.