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22 April 2021

A step closer to Diia City

On 15 April 2021, Verkhovna Rada (the Parliament of Ukraine) adopted the draft law №4303 “On Stimulating Development of the Digital Economy in Ukraine” in the first reading. The draft law defines the principles of a special legal regime in Ukraine – Diia City.

As claimed by its developers, the regime shall offer new legal instruments to be used by the Diia City residents in business activity and for attraction of investors.

Another draft law, which is planned for adoption in the nearest future, is designed to reduce the rates of corporate income tax and personal income tax (including the amounts of mandatory social contribution) for the Diia City residents and IT specialists.

According to the authors of the initiative, it aims to support and accelerate growth of the Ukrainian IT industry and strengthen the position of Ukraine among other jurisdictions for structuring of IT business.

To pursue this effort, the draft law intends to introduce:

  • concepts of gig-worker and gig-contract, a new model of cooperation between IT companies and IT specialists, as an alternative to common practice of engaging private entrepreneurs (independent contractors)
  • non-solicitation agreements according to which the residents can agree on limitations for solicitation of employees and customers
  • non-compete agreements according to which the residents can agree on limitations for their employees to enter into competition with the Diia City residents during their employment and after termination thereof
  • loan agreements with alternative ways to fulfil debtor’s obligations (debt-to-equity swaps), which set out creditor’s right to convert debt into company’s capital or increase the creditor’s share in the company
  • stock-options providing a right to purchase the company’s shares upon an agreed date or upon fulfilment of an agreed condition

These benefits of the regime will be available to the Diia City residents, ie, the companies that meet the criteria set by the law and have completed the registration procedure.

Let us recall that this is not the first attempt to create a special legal regime for the IT industry in Ukraine. The concept has been hotly debated for a long time by various stakeholders of IT industry, which is why it has changed many times. Discussions on certain elements of the legal regime and the search for consensus continue even today.

In view of this, the draft law may still change significantly before the next vote on it in the parliament.

It is likely that the adoption of the law shall have an impact on the model of cooperation with the independent contractors, which is widely used in Ukraine instead of formal employment. Depending on the particular business model in question and the final draft of the laws on Diia City, this may lead to restructuring of businesses. In this light, the recent parallel initiative aimed to fix employment relations characteristics in law should also be kept in mind.

For other industries and companies with in-house IT capabilities, introduction of Diia City may encourage spinning-off their R&D departments into separate business units that may use the benefits of the regime.

It is likely that many issues of practical implementation of the regime will remain unresolved even after the adoption of the draft law and until the relevant court practice has been established.

Given the ambiguity of the Diia City, companies should evaluate the possibility of using the benefits of the regime on the basis of tailor-made approach, taking into account the peculiarities of their own business structure and operating model. Diia City is far from the “one size fits all” solution.

We continue monitoring developments around Diia City and work with our clients on identifying whether and how Diia City can be best used for their strategic and operational business needs.

Stay tuned for the detailed review of the regime’s features in a series of upcoming materials.

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