July 2021 - On 15 July 2021, the Ukrainian parliament adopted the Law "On Stimulation of the Development of the Digital Economy in Ukraine" No. 4303 ("Diia City Law"). To become effective, the Diia City Law must be signed by the president and officially published*. The law comes into force on the day following such publication.

 General Diia City regime 

The Diia City Law introduces a general framework for launching a special IT industry regime in Ukraine called Diia City, which is aimed at creating favourable conditions for companies operating in the tech sector. The regime will be valid for an unlimited period but not less than 25 years.

 The status of a Diia City resident will be available only to Ukrainian companies that meet the criteria provided by the Diia City Law, in particular:

  • the minimum average monthly remuneration of employees / gig workers is EUR 1,200;
  • the performance of IT-related activities, which include software development activities, games publishing, EdTech, data processing, cybersport and others as provided by law;
  • the availability of at least 9 employees or gig workers at the end of each calendar month;
  • net income from qualified activities is at least 90% of total income; and
  • the company does not fall within a restricted category as provided by law.

 Diia City Law, inter alia, introduces:

  • gig contracts-a new concept in Ukrainian law, which is a mix of an employment contract and a services contract. Gig contracts can be concluded in electronic form;
  • social guarantees for gig workers;
  • new rules for the distribution of IP rights to objects created by gig workers and employees;
  • requirements to non-disclosure and non-compete agreements;
  • the conversion of outstanding debt into equity of Diia City residents;
  • the concept of warranties and compensation for misrepresentation;
  • additional regulation for put/call option agreements;
  • the possibility for Diia City residents to appoint a legal entity as an executive body; and
  • the ability to subject Shareholders Agreement to foreign law.

We note that as the Diia City Law introduces amendments to Ukraine's Civil Code, Commercial Code, Labour Code, and Law on Limited Liability and Additional Liability Companies, it will have an effect not only on Diia City residents but also on the wider regulatory landscape.

Diia City tax regime

The tax regime applicable to Diia City residents and their workforce will be regulated by a standalone law. The draft law "On Amendments to the Tax Code of Ukraine regarding the Stimulation of the Development of Digital Economy in Ukraine" No. 5376 ("Diia City Tax Draft Law") was adopted in the first reading on 2 June 2021. The date of the second reading is not yet known.

The Diia City Tax Draft Law introduces the following tax benefits. Diia City residents (i.e., legal entities) may choose one of two tax regimes that may be applicable to them. In particular, they may opt to be subject to the currently existing corporate income tax ("CIT") at a standard rate of 18% based on profits (subject to tax adjustments if applicable), or switch to the new regime providing for CIT at a rate of 9% on volumes of certain transactions with non-payers of CIT (which is a sort of exit capital tax).

In the event of a switch to the special taxation regime, the tax base of the Diia City resident would include, inter alia, the following payments to non-payers of CIT:

  • service fees payable to private entrepreneurs over a certain limit**;
  • the import and export of goods and services under certain conditions provided by law;
  • payment of royalty/interest/dividends under certain conditions provided by law; and
  • payments to not-for-profit organisations and zero-interest loans under certain conditions provided by law.

Employees / gig workers engaged by Diia City residents will be subject to:

  • a decreased 5% personal income tax on salary/remuneration;
  • a 1.5% military levy on salary/remuneration; and
  • a 22% unified social contribution ("USC") on:
  • the salary of employees of Diia City residents - in the amount of the minimum USC; and
  • remuneration for the performance of work under gig contracts (limited in between (i) the maximum cap calculated as 22% USCx15 minimum wages and (ii) minimum USC).

Overall, the Diia City regime will only become operational once both Diia City laws have come into force.

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.