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8 April 2022

Diia City regime and the martial law: relaxing the residency and reporting requirements

On 29 March 2022, the Ukrainian Government adopted a set of measures aimed at temporary relaxing compliance with the Diia City residency and reporting requirements under the Law of Ukraine “On Stimulating Development of the Digital Economy in Ukraine” No. 1667-IX, dated 15 July 2021 (the “Diia City Law“). Reportedly, the adopted set of measures concerns both those companies which desire to become the residents of Diia City and those which are already the Diia City residents (163 resident companies as of 1 April 2022).

Considering immense outflow of people from Ukraine and negative affect of the war on the Ukrainian economy, relaxed compliance and reporting requirements should help to ensure stability of the Diia City regime for the Diia City residents during the martial law, as well as smooth return to normal work after the martial law is cancelled.

In particular, for the duration of the martial law in Ukraine, the Diia City residency will not be cancelled if the resident:

  • does not comply with the Diia City residency requirements set out in art. 5 of the Diia City Law. Such requirements include:
  • a local legal entity should be engaged in at least one type of the eligible IT/tech activities;
  • 90 % of the Diia City resident’s income should derive from the eligible IT/tech activities;
  • the amount of average monthly remuneration paid to employees and gig-specialists should not be lower than an equivalent of EUR 1,200;
  • the average monthly number of employees and gig-specialists should not be less than nine;
  • the absence of the so-called negative requirements. This set of requirements consists of twelve criteria for legal entities which are not eligible for the Diia City residency status (e.g., an entity does not comply with the requirements regarding disclosure of information about ultimate beneficiary owners; tax debt; domestic or international sanctions).

The Diia City resident will not lose its residency even if non-compliance with the above requirements is established by court.

  • failed to file a Diia City compliance report and, where required, an independent audit report. Reporting obligation was postponed until 1 January of the year following the year when the martial law will be cancelled.

Generally, the Diia City compliance report includes information on whether the requirements set out in art. 5 of the Diia City are met. Currently, there is no official template for the compliance report. The template report should be adopted by the Ukrainian Government. In its turn, the audit report confirms that the information provided in the Diia City compliance report is accurate.

Under normal circumstances, the initial Diia City compliance report and, where required, independent audit report must be filed no later than six months after a company becomes a resident of Diia City. Afterwards, the compliance and audit reports should be filed annually no later than 1 of June following the reporting year.

Next steps for Diia City residents and newcomers

Although the introduced relaxation of the residency and reporting requirements is definitely a positive signal for IT business, it is still advisable for the Diia City residents to:

  • ensure compliance with the Diia City requirements to the extent possible during the martial law in order to avoid the material non-compliance, once the martial law is cancelled;
  • assess tax risks associated with relaxed residency and reporting requirements. It is disputable whether the Ukrainian Government has sufficient power to relax the discussed requirements stipulated by the Diia City Law, so, based on this, some offices of the Ukrainian tax authority may disregard the resolution of the Ukrainian Government and try to impose penalties. However, generally, the tax risks can be low as (i) the adopted resolution applies to the martial law period only; (ii) the Ukrainian governmental authorities strive to have a success story with Diia City and would likely avoid any Diia City related disputes between authorities and Diia City residents; (iii) the adopted resolution of the Ukrainian Government is a clear signal to other authorities, including tax authorities, that the relaxed requirements are desired during the martial law.
  • properly calculate and observe the reporting deadlines which are relevant for the Diia City resident;
  • monitor adoption of relevant bylaws regarding the official template for the Diia City compliance report and reporting procedure. The Ukrainian Government still needs to adopt it.

As for the newcomers, it may be a right time to become the Diia City residents as the eligibility requirements are relaxed.

Information contained in this overview is for general information purposes only, does not constitute legal or other professional advice, and should not be relied upon as a substitute for specific professional advice tailored to particular circumstances.

 

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