How Diia City operates during the war

The Diia City special legal regime launched right before the war. Some in the IT community had high hopes for it, some were watching it with distrust. Others were skeptically waiting for the state to start herding everyone into joining it as they were thinking of ways to resist it. The war put all this on hold, but now, with the country recovering from the initial shock of the Russian invasion, business is slowly getting back to work. Many in IT are wondering: what about Diia City? Is it working or perhaps the state has more important things to deal with right now?

I’m happy to announce: it is indeed working! IT is one of the industries that has endured and continued to work, paying taxes, supporting its specialists and more. At the same time, the state has changed the requirements for Diia City residents for the duration of martial law to allow as many companies as possible to benefit from it. Maksym Nosarev, IT lawyer and Tretten Lawyers CEO, explains what these changes are about and what attracts IT business to Diia City these days.

Published on ain.ua

Several IT companies join Diia City every day

Like most people, I believed that the Diia City project, which launched a few days before the war, would stall. After all, who would want a “white” status in exchange for +1.5% taxes? Will the state even go looking for hidden labor relations in IT companies right now, especially given the fact that in these dire times, this industry is among the few that are working normally.

Imagine my surprise when one day I checked the Diia City register and saw almost 200 residents on it. Moreover, their number is growing steadily – by several companies every day. There are 253 of them already!

It wasn’t that big of a surprise, of course. However, I was impressed to hear that most IT companies decide to join Diia City out of patriotism, feeling responsible for their country’s future. That is, they choose the “white” status not because they are afraid of being penalized if they don’t do it, but because they want to live in a new country, a country with completely legal and honest business practices. And they are ready to start with themselves.

Of course, patriotism alone is not enough for running and growing a business. As an alternative legal mechanism, Diia City does offer quite tangible advantages and benefits, since working within the legal field is, at the very least, safer for business. Companies get the opportunity to work under gig contracts, which is a new thing for Ukraine, to choose a taxation scheme that is more beneficial at the moment, etc.

My colleagues and I advise CEOs, financial directors, and other executives in IT on whether joining Diia City would benefit them. We calculate potential gains and losses and analyze what the company could expect under existing conditions in the near future, in a year, or in 5 years. While this convinces some companies to put off joining, many go for it after seeing what their future with Diia City would be like.

Learn more about our services for IT business on assessing Diia City benefits here.

Tax on withdrawn capital – interesting option for many

One of our clients is a Ukrainian company that essentially acts as a sort of production shop for a large international company. That is, they don’t actually generate income in Ukraine – they just create the product here. Their only customer is the parent company, which is based in another country. They usually receive one payment per month from it, which covers all expenses of doing business in Ukraine.

And yet, due to some circumstances, the nuances of our legislation, they still have to declare certain income, which means paying 18% tax on it.

This company’s CEO is currently preparing to join Diia City. The main reason for this is getting rid of that extra income tax. If, when joining Diia City, they choose the option of tax on withdrawn capital and will not be withdrawing any (which, given their business structure, was never the plan in the first place), they will be saving money by dropping the aforementioned tax burden.

Also, the company has several employees with quite high salaries – up to $10k. Currently, the company pays 42% taxes on this. However, if they become a Diia City resident and the employees remain in their positions, this tax burden will immediately decrease to 6.5%.

This is not just about savings and profits too. All these funds could then be used to boost business growth, create new jobs, etc. In fact, Diia City provides these conditions with this very purpose in mind.

What’s different with Diia City during martial law

From the very beginning, it was intended for companies wishing to join Diia City to be able to meet certain criteria. However, the state has relaxed these requirements for the duration of martial law – or, to be more precise, these requirements don’t apply right now. 

This was announced in a government resolution dated March 29, 2022. Here’s what it’s about:

1. The criterion “The company must have at least 9 employees and/or gig contractors” does not apply. That is, the company may now have, for instance, 6 or even just 1 employee.
2. The criterion “Average amount of remuneration for all employees/gig specialists must be no less than the equivalent of 1,200 euros for each” does not apply. This means that companies experiencing financial difficulties because of the war can still become Diia City residents and take advantage of its benefits.
3. The criterion “Qualified income from special activities is at least 90% of the total income” does not apply. Now an IT business could sell socks and still remain a Diia City resident, although I doubt anyone would actually try something like this.

Those companies that are residents of Diia City already will find some things to be simpler as well. Under pre-war rules, they would have to submit annual reports on compliance with a certain list of criteria, but it’s unnecessary as long as martial law remains in effect. The practical value of this change is in saving companies a few thousand dollars on preparing those reports. While not much, this is the government at least trying to address the needs of business.

If you believe it’s time to weigh the prospects of joining Diia City for your IT company, or if you have already decided to join, our lawyers are ready to help – contact us now here.

Everything is better than we imagined. At least for now

So, as we can see, the government hasn’t put Diia City on the back burner as a project because of the war. It’s working and growing already.

The fears of many IT players that business would be strongarmed into joining Diia City by inspections, legislation, and other methods have been proven unfounded. We haven’t seen any signs of foul play so far.

Shortly before the war, the CEO of a company that’s in the process of obtaining the status of Diia City resident spoke rather positively about the project team’s work. According to him, they are very diligent and effective in helping businesses transition to the new legal regime. Reviews like these are not an isolated occurrence too.

Of course, this doesn’t mean that Diia City is a panacea for every problem in IT and that everyone should join without a second thought. After all, the structure of Ukrainian IT companies is often rather convoluted and ambiguous. However, as an option for growing one’s business, Diia City is certainly worth considering.