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17 August 2021

Diia City – a new age for the Ukrainian IT sector?

After three months of refining, on 15 July 2021, Verkhovna Rada of Ukraine (the “Parliament”) adopted the draft law № 4303 “On Stimulating Development of the Digital Economy in Ukraine” (the “Law”) in its second reading.

On 11 August 2021, the President signed the Law, and on 14 August 2021, the Law entered into force.

The Law launches the Diia City regime and defines its key elements:

  • principles and guarantees of the legal regime
  • criteria for the Diia City residency and compliance requirements for its residents
  • the regime’s governance system mechanisms
  • new options for engagement of IT specialists
  • new legal instruments, exclusive for the Diia City residents, that are common abroad but have not been fully implemented in Ukraine

According to the Law, the regime is set for an indefinite term that cannot be less than 25 years from the date of registration of its first resident.

Gig-contracts

The Law introduces gig-contracts and gig-contractors – a new form of talent engagement and an alternative to formal employment and engagement of private entrepreneurs. Gig-contracts are available exclusively for the Diia City residents. Gig-contracts aim to combine the best of the two worlds: flexibility of private entrepreneurship and social security benefits available under formal employment.

In addition, it is expected that the gig-contractors will be able to enjoy lower payroll tax rates. The exact rates are to be defined by separate amendments to the Tax Code, which are under revisions prior to the second hearing by the Parliament. By authors’ initial design, the income from gig-contracts should be subject to a comparable tax burden as income of the group 3 payers of the unified (single) tax (at the rate of 5 per cent  plus additional 1,5 per cent on received income).

For more information on the gig-contracts, please see our brief overview here.

Exclusive legal instruments

In addition to gig-contracts the Law offers to the Diia City residents several other exclusive legal instruments designed to foster the investment climate in the industry and many of which have been a common practice abroad:

  • non-disclosure agreements (art. 26 of the Law)
  • non-compete agreements (art. 27, 28 of the Law)
  • debt-to-equity swaps (art. 29 of the Law)
  • stock options (art. 30 of the Law)
  • preemptive rights for distribution of the resident’s assets (art. 31 of the Law)
  • warranties and indemnities (art. 32 of the Law)
  • executive body in a form of a legal entity – managing company (art. 33 of the Law)

You can find more details on some of the new instruments in our brief overview here.

Who is eligible for residency?

In general, Ukrainian companies meeting each of the following set of criteria may obtain residency in the regime:

  • engaged in one or more types of business activity listed in the Law. Interestingly, the list is not exhaustive and additional types of business activity may be defined later by the Cabinet of Ministers of Ukraine
  • the monthly average salary of the company’s employees/gig-specialists is no less than EUR 1,200
  • the company has nine or more employees/gig-specialists
  • no less than 90 per cent of income is generated from the business activity mentioned in para 1 above
  • the company does not meet a single negative criterion according to the exhaustive list provided by the Law

A separate set of simplified criteria is provided for the startups registered not earlier than 24 months from the date of registration as the Diia City resident.

When will the regime start working, and what’s next?

Except for the clauses related to the virtual assets in Ukraine (e.g. cryptocurrencies), the Law enters into force next day after it is published. As of now, the following two key pieces are still missing for the Diia City to work:

  • amendments to the Tax Code of Ukraine that define financial incentives to apply for residency in the regime. This might be the only driver for the regime to attract Ukrainian IT companies that for many years have engaged their specialists as private entrepreneurs and may see no apparent reason to stop this practice. Respective draft law is currently being prepared for the second reading in the Parliament.
  • a set of bylaws that define all underlying procedures, which the Cabinet of Ministers of Ukraine is required to develop within the next six months upon entering the Law into force.

Although there is still some work to be done lawmakers are expected to finalise all related matters by the end of 2021. Consequently, the Diia City is expected to welcome its first residents early in 2022.

We continue monitoring developments around Diia City and look forward to the next chapter of this story in the form of the amendments to the Tax Code to share more light on the regime’s attractiveness for Ukrainian IT companies.

 

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