New taxes for IT companies and developers in Ukraine. What are they?

Recently Ukraine established a dedicated legal framework to boost the IT industry, which is commonly referred to as “Diia City.” Companies that decide to join the special treatment will enjoy a set of benefits, including taxes. Here we divide all of them into two groups – corporate tax and employee taxes:

Corporate tax

It is provided that an IT company will be able to choose between two options – corporate income tax, which is calculated on net profits, or a distributed profit tax, which is calculated on a value of assets distributed from the company:

• 18% corporate tax

This is a classical corporate tax which is calculated as [income] – [expenses] = [net profit]*18% = [amount of tax to be paid]. 

In this case, the key point to pay attention to is that only expenses related to the company’s business activity are taken into account. Basically, the way this tax is being calculated is more or less similar to a lot of countries.

or

• 9% distributed profit tax

There is no obligation to pay a corporate tax as long as profits are reinvested, i.e., stay within the company instead of being withdrawn. It is a completely new tax that applies only to the IT companies which joined Diia City special regime.

The Tax Code stipulates what should be regarded as a distribution of profits. For example, the obligation to pay taxes will arise if dividends are paid, property alienated or services provided free of charge, company’s money paid as financial assistance to other company or individual and other cases.

Still, companies may choose not to join the Diia City and benefit from the Single Tax of 5%, which has been in existence in Ukraine for years. Although it comes with significant limitations – (1) USD 250 000 of income per year allowed and (2) companies will not be able to benefit from the reduced employee taxes described below.

Employee taxes

Amendments provide for low taxes on salaries, especially compared to those usually applicable worldwide. The total amount of taxes subtracted from the salary is set at 6,5%, while employers shall pay additionally only around USD 50 (as of Jan 2022):

• 5% personal income tax

Probably this is one of the lowest personal income taxes worldwide, not counting countries in which it is set at 0%. It is calculated from the total remuneration of an engaged specialist – an employee or a private contractor. This tax shall be withheld by the company, subtracted from the salary, meaning the recipient receives 5% less. It is applicable if the yearly salary does not exceed a sum of around USD 270 000; otherwise, the amount which exceeds is taxed at 18%.

• 1,5% military levy

Calculation of the tax is similar to the personal income tax up to the point where you may just add up those two for easiness. Similar to income tax, this shall be calculated on the company’s total remuneration but subtracted from the salary, meaning the recipient receives 1,5% less.

• 22% social security tax

It may look high compared to those above, but it is relatively low as it is calculated from the minimum salary in Ukraine (circa USD 250 as of Jan 2022). Therefore, social security tax will be in the range of USD 50 per employee, notwithstanding the actual salary paid. It is not subtracted from the salary but calculated by the company on top of it.

Example of salary tax calculation:

Sure enough, taxation makes only a part of a generally competitive destination, although an important one. Diia City also tries to tackle other issues which may stand in the way of attracting investments into the IT sector. What is no less important than the regulations themselves is the pro-business line of communication from the Ministry of Digital Transformation, which manages the project and perceives Diia City as its core project, and it seems they would really like to make it a success story.

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