DIYA CITY. First steps

Nowadays, the adoption and entry into force of the Law on “DIYA CITY” is widely discussed in the mass media and legal circles. This law primarily regulates the IT sector and was created to improve and develop this sector in Ukraine. Therefore, the question arose concerning the analysis of this law and the determination of its key advantages and disadvantages.

Thereby, with the adoption of the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine”, such a concept as “Resident of DIYA CITY” (hereinafter – Resident) appears in the legislation of Ukraine, which means a legal entity created in accordance with the legislation of Ukraine and has this special status.

What does the special status of a resident of “DIYA CITY” provide?

• The Resident is under the special legal regime of “DIYA CITY”, which is established from the moment of its registration in the “DIYA CITY” registry, and operates until the liquidation of the legal entity. It is important that this status can be established for at least 25 years.
• Most of the Resident’s employees acquire the status of “Gig specialist” – a person with whom the “Gig contract” is concluded.
• Accordingly, a “Gig contract” is a “know-how” in Ukrainian legislation. This is a special type of agreement between an employer and an employee, which includes elements of an employment contract and a civil law contract. To put it simply, this is such a unique form of relationship that includes elements of freelancing and elements of social guarantees that are usually provided by employment contracts.
• It should be mentioned that the law provides the protection of Residents from pressure on business by law enforcement agencies, so Residents will be granted a special status in criminal proceedings.
• Settlement of relations regarding property and non-property rights to intellectual property created during labor relations. For example, when writing program code under the terms of a gig contract, personal non-property rights will belong to Gig-specialists, and property rights will belong to the employer (the Resident), a legal entity. Of course, the “gig contract” provides to foresee other options.

What special conditions does the Law on regulation of tax relations for Residents of “DIYA CITY” provide?

Labor taxes:

• 5% personal income tax
• SSC 22% of the minimum wage (we draw your attention to the fact that 22% must be calculated from the minimum wage stipulated by the Law of Ukraine “On the State Budget” for the current year.).
• 1.5% military levy

For a better understanding, we provide you with a comparison table regarding the taxes that will be paid on a notional reward of 2000 USD.

The official exchange rate established by the National Bank of Ukraine as of November 1, 2021 is UAH 26.2767 per USD 1.

Taxes on the income of a legal entity and its participants:

• 9% on “withdrawn capital” or 18% on profit. Residents independently will be able to choose the most suitable taxation system for them. We will further cover the comparison of these 2 systems for you in the next series of notes on DIYA City.
• 0% on dividends of an individual, if they have not been distributed for 2 years or more.

With a view to attracting angel investments:

• 0% on the income of an individual from the sale of a share in a startup, which must be a resident, provided that the investor will own it for more than a year.
• a tax discount on the amount of investments in Ukrainian startups, subject to compliance with all the requirements that will be provided by the legislation.

How to regulate partnership relations of Residents?

Of course, during the existence of the “technical hub”, it will be much easier to establish partnership relations, find potential partners and generally develop business. Therefore, we would like to draw your attention to several points that will regulate the partnership relations of Residents among themselves.

• First of all, Residents will be able to determine compensation amounts in case of breach of the non-disclosure agreement, i.e. NDA.
• Payment of compensation in case of “competitive actions” committed by one of the parties in relation to the other party. For example, you have agreed to create a joint IT project, but you are worried that your partner will use unique codes to develop his own project. In order to avoid this, you will be able to foresee considerable amounts of compensation in the event of such a situation.
• Your potential partner motivated you to invest in the development, but it turned out that you were given false assurances about the project? So, you can expect to be compensated for the falsehoods. According to the logic of the legislator, false assurances should be considered information provided by a party or parties regarding circumstances that are important for the conclusion, execution or termination of an agreement.

In conclusion, we may emphasize that there have become many more novellas, concepts, and requirements. Therefore, if you or your IT specialists require detailed advice on taxation systems, benefits and analysis of the feasibility of obtaining the status of a resident of “DIYA CITY” by your company or you, Smartsolutions specialists will be able to help you with these questions.