On 2 June 2021 the Parliament of Ukraine adopted the Draft Law No. 5376 “On Amendments to the Tax Code of Ukraine regarding Stimulation of Development of Digital Economy in Ukraine” (“Draft Law”) in first reading. The Draft Law provides for the taxation regime for companies that are registered with Diia City (“resident of Diia City”), their investors, employees, and engaged gig-specialists.
Under the Draft Law, a resident of Diia City pays 18% CIT on the pre-tax financial result subject to tax adjustments, or may opt to pay (1) 9% CIT on the profit distributions and (2) 18% CIT on the value of transfer pricing adjustments arising from controlled transactions and CFC income. Dividend or interest payment, investment abroad, settlement of payables, shares/participatory interest buy-back and certain other transactions may qualify as profit distribution for tax purposes.
According to the Draft Law, the personal income tax (“PIT”) rate for employees and gig-specialists engaged by a resident of Diia City is less than for employees of a regular Ukrainian company, 5% as opposed to 18%. A resident of Diia City pays unified social contribution (“USC”) based on the statutory minimal wage of an employee, whereas regular Ukrainian company pays USC based on the actual salary. Wages of employees and gig-specialists engaged by a resident of Diia City are subject to 1.5% military duty, same as wages of regular employees.
The Draft Law exempts from PIT capital gain realized by an individual on the sale of shares/ participatory interests in a resident of Diia City, provided that the individual holds respective shares/ participatory interests for more than a year. Dividends received from a resident of Diia City are exempt from PIT if a resident of Diia City does not distribute dividends during two subsequent years.
The Draft Law is silent on the tax implications for a company if its employees or gig-specialists were engaged as private entrepreneurs before the company applied for Diia City residency. The current version of the Draft Law provides that a resident of Diia City pays USC based on the actual consideration payable to gig-specialist rather than statutory minimal wage as Ministry of Digital Transformation claimed during public discussions.
Overall, while Draft Law provides lower tax burden on residents of Diia city, conditions of certain tax incentives and historical risks for prospective Diia City residents should be addressed in the Draft Law before the second reading.
Andrii Buznytskyi, Manager, International Tax Group, KPMG in Ukraine