• It all started with a series of tweets by Yulia about her life in Estonia, and how she lives there but pays taxes in Georgia, because of the much lower rates. So far, Yulia privated her Twitter account, but there are many screenshots left.
• Explaining the decision to register as an individual entrepreneur in Georgia, she referred to the “Russophobic embassy” in Estonia. She also wrote that she does not want her taxes to be spent on Ukrainian refugees:

• Twitter users quickly tagged The Ministry of Foreign Affairs of Estonia, the police, as well as local activists. The former president of the country, Toomas Hendrik Ilves, also paid attention to the thread. He wrote that Estonians are proud to pay taxes and believe that everyone who lives in Estonia and uses its freedoms, benefits, and public services should do the same.

• Yulia responed to Toomas that “some troll pretends to be the ex-president of Estonia and will allegedly investigate my taxes. How many brain cells you need to believe that?” She did not pay attention to the fact that his Twitter account was verified. The users confirmed that president is real. Toomas himself cited the proverb that “when stuck in a hole, you should stop digging.”

• Yulia got deanonymized very quickly (it was not difficult, because she is known in the Vue community), her Telegram channel was discovered and later flooded with messages. At some point, her Telegram page looked like this:

• Nonetheless, Yulia considered herself a victim and complained that she was being bullied:

• And finally, on August 3, 2022, she wrote that she got fired:

• And the other day, the Russian publication Razrabs.ru published an article that told the story from Yulia’s pespective. The article claimed Yulia was a victim in this situation, a pregnant girl who was unfairly bullied online and deprived of her job. “I got the impression that I was being bullied just because I am Russian,” she writes.

The editors of AIN.Capital hope that the more such stories become public, the easier it will be for European countries to introduce a general visa ban for Russians. By the way, here is a thread from the ex-president of Estonia, inspired by this and similar stories, about why a visa is not a right, but a privilege.

What happened?

• There should be a scheduled fiscal check at MySales Labs in 2020, but it has been postponed to 2021 because of the COVID.
• According to Ivasyuk, the fiscals checked three specific persons who received payments as individual entrepreneurs (FOP) for software development and technical support. And the founder said they were the company’s 0.25 part-time employees for some time until they got fired. The founder also described the situation on his Facebook page:

“We provided the officers with all the required documents and explanations against protocol; we hoped everything would be according to the law. But then they wrote in their protocol that we have not provided any documents! Before sending the protocol back to us, they called and said, ‘We understand that you can be right but our leaders demand it so. So, you can go to the court.’ […] They decided to calculate additional taxes for those payments to the FOPs for software development and technical support + fees with an interpretation that we had a labor relationship. Are they actually authorized to do this?”

• Ivasyuk also explained that they provided the fiscal officers with personnel job descriptions, and there was no word about software development. He stated these specialists had been employed after getting payments as FOPs.
• But the Fiscal Service claimed not received those documents despite signed registries of provided articles of incorporation. Due to such “non-providing,” the authority interpreted payments to the FOPs for software development and technical support as labor relationships and issued ₴2.6 million in penalties since 2017. The founder referred to lawyers and said that employees might be 0.25 part-time employed and be FOP simultaneously.
• AIN.UA has also learned the documents: Based on them, MySales Ukraine did really provide the State Fiscal Service with its business documents, including turnover statements, job descriptions, acceptance certificates with FOPs, and labor agreements. On the register of those documents are signatures of fiscal officers who performed the inspection. At the same time, according to the appendix to the inspection protocol, the company should refuse to provide those documents. At the same time, according to the appendix to the inspection protocol, the company should have refused to provide those documents.
• Ivasyuk told AIN.UA that MySales Labs is now disputing the decision with the tax authority, and later, it is going to be challenged in court.
• According to the founder, it is a huge amount for a startup to pay and he cannot pay ₴2.6 million, so mySales is moving its main activities and contracts to the UK, with the only R&D office remaining in Ukraine. The startup’s founder is also considering moving from Ukraine to the UK.

What is Diia City? (in a nutshell)

Diia City is a special operational mode for Ukrainian IT companies providing special conditions, taxation, and a new form of interaction — gig contracts — for its participants. It also implements several terms from British law that will be useful for companies getting foreign investments — option contracts, convertible loans, etc. But it also introduces some limitations for the cooperation with FOPs (individual entrepreneurs).

How to check if a company may participate in Diia City?

AIN.UA has described entry terms of Diia City in the past; now we would like to recall them briefly (you can also check them under article 5 of the Digital Economy Promotion Law:

• A Diia City resident must be registered in Ukraine.
• The company must do one or more activities determined under part 4, article 5 of the Law (e.g., programming, software testing and publishing, developing computer games and databases, etc. — the complete list is stated at the end of this article, for more, please see the next part).
• The average monthly salary must be from 1,200 EUR according to the official exchange rate of the NBU.
• The average number of workers and gig specialists must be not less than nine.
• At least 90% of income must be qualified (it means it must be generated from the activities stated under part 4, article 5 of the Law).

What activities can be done by Diia City residents?

The activities that are supposed to be promoted by this Bill and are required from companies to join Diia City are following (we have shortened the list a bit, but still, it contains the main of them):

1. Computer programming, informatization consulting, hardware management, including
   1. Software development, modification, testing, and technical support, including computer games, and other types of work at all stages of the software development lifecycle, including business analysis, user interface design, etc.;
   2. System software and application development, including computer games, databases, and websites;
   3. Software setup for the customer informational systems and end-user devices; configuration of third-party software;
   4. Planning and projecting integrated computer systems combining hardware and software; consulting and training for users of such systems;
   5. Administration and operation of custom computer systems and/or data-processing means;
   6. Other development, modification, tests, and technical support of computer games.
2. Computer game publishing.
3. Providing online software products, including computer games.
4. Education in the IT industry.
5. Data processing and related activities, except for renting infrastructure for data processing and publishing (hosting); websites function, including automated data processing, report generation, website administration, etc.
6. Study and experimental development in natural and technical sciences connected with IT.
7. Performing marketing campaigns and providing advertising services using programs developed by a Diia City resident.
8. Organization of cybersport contests, teams, centers, and clubs for such competitions.
9. Providing services connected to virtual assets turnover.
10. Providing cybersecurity services for information and communication systems, including detection and protection against cyberattacks, liquidation of their consequences, etc.
11. Robotics.
12. Other types of activities determined by the Cabinet of Ministers.

How to apply for Diia City residency?

There are not so many details about how the Diia City entry process will look. However, according to the Ministry of Digital Transformation, it must be declarative and straightforward. What can we know for sure?

• To join Diia City, a firm registered as a legal entity must submit a specific application to the Ministry of Digital Transformation.
• It will be possible at the particular web portal that is being developed by the Ministry. AIN.UA will inform you about the start of the portal later.
• After submitting basic information about the company, all other data will be automatically loaded from state registries.
• The applicants must check if the final information is correct, sign the application with their digital signature, and press the “Submit” button.
• The declaration principle of application means that if there are no reasons to return it without acceptance, the company will automatically become a resident of the special mode. The Ministry reps said that Diia City would function on the tacit agreement: if an applicant received no response after ten days, his application is considered as accepted.
• The application can be returned without acceptance due to mistakes, lack of authorization of the company representative, no entries in the Unified State Register about the company, or according to the applicant’s will.  An application can also be declined if an applicant meets negative criteria.
• After applying, the candidate will be checked for negative criteria. The Ministry of Digital Transformation will use open sources — state registries, databases, information from authorities, and intergovernmental organizations. So, there will be no need to provide any references.
  • The negative criteria (causes for refusal) are, for example, a non-Ukrainian registration, a non-profit company, a firm with unknown beneficiaries, an entity the shares of which are directly or indirectly in possession of the Russian Federation or its citizens, etc. The complete list of negative criteria is stated under part 2, article 5 of the Law mentioned above.
• In addition, after 3 to 6 months of residency, the company must provide a compliance report and an auditor’s conclusion. Startups must submit it only after a year of residency.

We will update this article as we’ll receive more new data.

Diia City is a special legal framework for the Ukrainian IT industry. A company that meets the list of requirements can voluntarily become a resident of Diia City. But certain restrictions on work with FOPs (individual entrepreneurs) will be applied to them (we will describe them below).

The specifics of the regime:

• Residents of the special regime will be able to choose which corporate tax to pay: 9% exit capital tax (ECT) or 18% income tax.
• Individuals’ income in the form of dividends accrued by a resident company will be exempt from taxation, provided that they are paid no more than once every two years. There will also be a tax rebate for individuals in the event of the acquisition of a stake in a startup that is a resident of Diia City.
• Income of employees and gig specialists of Diia City residents will be taxed: personal income tax – 5%, SSF – 22% of the minimum wage, military duty – 1.5% (of an employee’s salary or a gig employee remuneration). If a professional receives more than 240,000 euros per year, all income above this limit will be taxed at 18% PIT.
• Taxes for FOPs cooperating with IT companies will remain the same as they are now.

We will also remind you of the rules introduced by the Diia City bill for IT companies working with FOPs:

• Companies that pay a Corporate Income Tax of 18%, whose annual income does not exceed 40 million hryvnias, will be able to work with FOPs without restrictions during the entire period of the Diia City regime.
• For all other residents, payments to FOPs should not exceed 20% of total costs. For those companies that will pay the exit capital tax, amounts above the limit will be subject to this tax at the rate of 9%.
• For companies that pay a Corporate Income Tax, those costs for FOPs that exceed 20% will have to be included in the financial result.
• Restrictions on working with FOPs will be fully operational only from 2025. Until then, there will be a transition period of three years: until 2024 – no restrictions; in 2024, tax-free payments not exceeding 50% will be allowed.

What has happened

On November 24, Ukraine received a $700 million tranche from the IMF and signed the Memorandum on Economic and Financial Policies. The document states that Ukraine will not substitute its corporate income tax with the exit capital tax.

“After a careful technical assessment, we will not move forward with substituting the current income tax for a exit capital tax (DPT),” the document says.

The problem is that DPT is one of the key benefits of the Diia City legal regime. It is offered to Diia City residents among the taxes they can choose from. The corresponding amendments are set out in bill No5376. By the time of signature of the Memorandum, it has not been adopted on second reading. Deputies will vote on the bill on December 2.

This has raised allegations that the provision on DPT can be removed from the document on short notice. But the Ministry of Economic Development says this will not happen, because the agreement with IMF does not apply to the Diia City regulations.

“Because we do not substitute the corporate profit tax for the exit capital tax, we offer residents of the special regime different taxation models to choose from. That is why the taxation part of Diia City remains unchanged,” the Ministry of Digital Transformation has replied.

How taxation will work in Diia City

Diia City is a legal regime that will apply to the Ukrainian IT industry. A company that meets the list of requirements can opt to become a Diia City resident. The specifics of the regime:

• Special regime residents can choose at their discretion which corporate tax to pay – a 9% exit capital tax (ECT) or an 18% income tax.
• Personal income in the form of dividends distributed by a resident company will be exempt from taxation on the condition of being paid out not more often than once every two years. There is a tax reduction envisaged for natural persons in case of buying a stake in a startup which is a Diia City resident.
• The income of employees and gig-workers of Diia City residents will be taxable: personal income tax – 5%, Social Security fee – 22% of minimum national wage, military tax – 1.5% (of an employee’s salary or a gig-worker’s remuneration). If a professional receives more than €240,000 per year, then all their income exceeding this limit will be taxed at the rate of 18% of the PIT.

Maxym Nosarev, an IT lawyer and the founder of Tretten Lawyers, says that the introduction of the exit capital tax is attractive for business. It allows companies to use more funds for their development and refinancing.

The legal expert explains how this works. A company has earned $100,000, and corporate income tax means that the percentage applies to the entire amount. In case the exit capital tax is introduced, the portion of the income which covers operating and development costs is not taxable. “Such taxation regime has been successfully applied, for example, in Estonia. And quite a few IT companies, including Ukrainian ones, now choose this country to register their offices there,” Nosarev says.

Why IMF is opposed to the exit capital tax

According to Anton Zaderyholova from the law firm AVELLUM, the main reason is a quest for stability. Corporate income tax guarantees regular budget revenues, and DPT is less predictable. Thus, this can affect Ukraine’s ability to settle its debt on time.

“In essence, DPT is the taxation of dividends. Not all companies plan to apply their undistributed income towards dividend payouts. Corporate income tax is a guaranteed budget revenue that directly correlates with GDP growth.

Ukraine has grave problems with access to fair justice and other macroeconomic problems, such as limited access to low-cost funds. The introduction of DPT is unlikely to attract new investors. The main objective, in my opinion, is not to lose the tax revenues which already exist,” the lawyer says.

• In June 2021, the President signed law No. 1525-IX, which introduces 20% VAT on online services provided to Ukrainian users by non-resident companies. According to new rules imposed by this law, such electronic services are subject to VAT (20%).
• To comply with these rules, Google starts to charge 20% VAT on its services in Ukraine. This increase applies only to services provided to individuals. Nothing changes for companies and entrepreneurs with business accounts:

The document supplements Article 208 (on the taxation of services delivered by non-resident companies in Ukraine) of the Tax Code with the regulation on taxation of electronic services. According to the text of this article, electronic services that non-resident companies supply to individuals in Ukraine are subject to VAT (20%).

“A non-resident company is a company that does not have a permanent representative office in the country. It must register in the Ukrainian tax office as a VAT payer to provide services to Ukrainians.”

At the same time, the “tax on foreign advertising” rule is excluded from the code. That means that Ukrainian legal entities and individual entrepreneurs will not have to pay a 20% tax when buying electronic services from foreign companies.

Previously, one of the authors of this initiative Danylo Hetmantsev, Chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, published an infographic on Telegram on how the regulations of this draft law would work. In particular, it contains data on which services will be considered electronic and which will not (in the first case, a 20% tax, which is adopted by this bill, is applied).

What types of services will be considered electronic?

• Downloading movies, books, magazines;
• access to the databases;
• access to the television channels;
• access to the electronic resources;
• distance learning services;
• cloud services;
• software delivery;
• providing advertising services on the internet.

What types of services will not be considered electronic?

• Car rental services;
• products delivery services;
• passenger transport services;
• distance learning services between teacher and student;
• providing consulting services via email;
• internet access services.

Previously, we wrote about what is wrong with this initiative. In a nutshell: it would mean a 20% increase in the price of services for users.

Both the Diia City bill and the special taxation regimefor its residents are in one package — they do not work without each other. Previously, we wrote about what the Diia City regime is, as well as its disadvantages.

The bill, which was adopted by the deputies on the first reading today, imposes the following special tax rates for resident companies of Diia City:

• personal income tax at 5% (this rate can be applied for the salaries of resident companies’ employees, for payments to gig specialists on gig contracts, for royalties);
• unified social contribution in the amount of the minimum insurance contribution for employees of resident companies, or at the rate of 22% of the determined amount of the USC base determined under the terms of the gig contract;
• corporate tax or income tax at 18% or a 9% tax on distributed profits;
• military tax at 1.5%.

AIN.UA will follow the further work of the parliament on these bills.

• No. 14 – Kyivstar, a telecom operator which paid about ₴6.7B in taxes over a year.
• No. 20 – Vodafone Ukraine, a telecom company. The ranking does not show the amount of taxes, but judging by the closest companies from the list, it is ranging between ₴3.3 and ₴2.8 billion.
• No. 24 – Google’s Ukrainian office. As in the previous case, the amount of tax paid by the company is not specified, but Epicenter, which ranks 23rd, the annual taxes amounted to ₴2.8 billion, and DTEK Pavlogradugol in the 25th place – about ₴2.6 billion. Thus, to get the 24th position, Google had to pay up to $100 million to the budget.
• No. 44 – Ukrtelecom, a fixed-line and mobile operator, which in 2020, paid to the budget an amount between ₴1.5 and ₴1.4 billion.
• No. 62 – Lifecell, a mobile operator, paid about ₴1 billion in taxes last year.
• No. 155 – Emarket Ukraine, LLC (OLX Group). The company paid between ₴341 and ₴337 million in taxes last year.

The ranking also includes operators of the postal logistics market in Ukraine, Nova Poshta and Ukrposhta. Nova Poshta is ranked 19th and paid between ₴3.3 billion and ₴2.8 billion in taxes in 2020. Ukrposhta is in No. 40 with the amount paid of ₴1.5 billion.

The top positions are given to Ukrnafta, Ukrgazvydobuvannya, and Naftogaz.

In a nutshell, Diia City is a special legal framework for Ukrainian IT companies that can apply to participate in it. The project’s duration is 15 years. Its key provisions include the following:

• All companies wishing to become members of Diia City must submit applications. Then they are included in the register of residents of Diia City.
• The concept of gig employees and gig contracts is introduced.
  • A resident of Diia City can conclude an agreement with an individual, according to which such a gig employee undertakes to perform the work specified by the company personally. This work will consist of tasks (gigs), projects, and orders of the employer or their gig employees. The employer undertakes to pay for the gig employees’ work and provide proper work conditions if the work is not performed remotely (a gig contract).
• A special tax regime is being introduced for participating companies: personal income tax at 5%, single social security fee – 22% of the minimum wage, corporate tax with a choice of either an 18% income tax or a 9% exit capital tax, and military tax at 1.5%.

The first version of the Diia City bill was criticized by many market participants, particularly for the risks of working with private entrepreneurs, for the too broad powers of the Ministry of Digital Transformation in terms of management of Diia City, etc. (details are here).

After that, the Ministry finalized the bill and presented an updated version in March 2021. We wrote about its key differences with the previous version earlier. But the IT community still had questions about the project, particularly about non-enticement and non-compete agreements (we wrote about this in more detail earlier).

Tax rates for resident companies of Diia City are described in a separate bill, which will be put to the vote in the first reading after bill No. 4303.

Why is it important: the bill will become the starting point for creating a special legal regime for the development of the IT industry in the country.

What’s next: The Ministry of Digital Transformation emphasizes that some of the amendments (for example, removing non-enticement and non-compete clause, which may complicate job changes for employees of participating companies) were not included in the draft, which was voted on April 15 in the parliament. The Ministry promised to remove them by the second reading. The updated text of the bill is not yet available.

What happened

On November 3, 2020, the deputies approved bill No. 4065 amending the tax code, on first reading. Its provisions move the date of obligatory reporting on and paying taxes for, CFCs for a year. One should remember that this is just the first reading, though. For the date to be actually postponed, the Parliament must adopt the bill as a whole, and then it must be signed by the President.

Lawyer’s commentary

AIN.UA’s editorial office has asked the founder of the law firm Rikk, Vlad Yaroviy, to comment on the approved bill.

“Let’s see what benefits/threats this bill on CFCs could incur. Strange as it may seem, I see nothing particularly negative specifically for CFCs. All of us have been expecting the Verkhovna Rada to move the CFC taxation deadlines, because, frankly speaking, neither the state, nor business is ready for that yet.

And so it happened; now, the first accounting period should be the year 2022. Moreover, the business has an opportunity to monitor the situation even until 2024, because there will be no penalties for 2022–2023.

In this country, no one wants to be a pioneer; usually, this does not end very well. I think lawyers and advisers will also wait for some practice in the application of the law before filing anything for their clients.

There is also an option for the tax-free dissolution of CFCs under the established procedure, allowing an individual not to pay the personal income tax or military tax afterward. The rest of the changes will rather affect transfer pricing, permanent establishments, etc.”

During the study of the matter, the editor of AIN.UA learned that not only the Ukrainian Startup Fund grants are taxable. Under the Ukrainian jurisdiction, a startup has to pay tax on any grant.

The editor of AIN.UA shares the details.

How did it become known about the grant income tax?

In July 2019, the Cabinet of Ministers launched the Ukrainian Startup Fund, a state program that provides grants to Ukrainian projects.

As it became known to AIN.UA, some startups have already received a grant under this program, but not in full, as the amount reduced due to taxes. Startups were provided with an explanation from the STS about the reason for such taxation.

At the same time, according to AIN.UA, some participants in the grant program do not yet suspect that they will not receive the full amount. The point is that the information about the tax is provided almost at the very end of the program when a startup counts on the grant and is waiting for payment.

Why grants are taxable?

There is an explanation by the State Tax Service, which was provided to the Innovation Development Fund under the Ministry of Finance. It says the following:

If a startup receives a grant (a one-off special-purpose payment to individuals and legal entities) and operates as an individual entrepreneur, such a grant is subject to general taxation. In other words, if the founder of a startup is an individual entrepreneur and he or she receives a grant, in this case, one is considered as an individual who has received income but not from business activities. Such a grant is the total income of an individual, which is taxed under the general rules.

Such income is subject to an 18% income tax and a 1.5% military fee.

If the grantee is a legal entity, it pays an income tax on the grant.

The USF provides two amounts of grants, but the sum is less than expected:

• The promised sum is $25,000. The grantee receives $25,000, minus a 19.5% tax = $20,125.
• If the promised amount is $50,000, a startup gets $50,000, minus a 19.5% tax = $40,250.

Exchange rate difference

Tax isn’t the only trouble the startup is facing. The currency of Ukraine is hryvnia, which means that the grant amount is paid in hryvnia, not in dollars. And an important nuance is that the grant is paid at the rate at the time of application, not at the time when the money comes to the account. As a result, due to exchange rate fluctuations, a startup may receive even less money than expected at the very beginning. However, it may be even more.

Some startups are not aware of this either.

The editorial staff of AIN.UA talked to several startups about the tax that no one expected. Everyone says that it’s unpleasant and strange to get a much smaller amount than you expected at the beginning. At the same time, one of AIN.UA’s interlocutors said “never look a gift horse in the mouth,” and he doesn’t get peeved with the Ukrainian Startup Fund.

The tax rates remain the same – fixed one for the 2nd group, 5% of the income – for the 3rd, the minimum wage on the basis of which ERUs are charged will increase a bit. The current year’s minimum wage established by the budget was UAH 3,723, the following year it will raise to UAH 4,173. The rate of UST did not change and remained at 22%.

An example of tax calculation for self-employed individuals of the 2nd and 3rd groups Lubomir lists in the following table (in UAH):