In 2021, the whole IT industry was waiting for the launch of Diia City. How is it going to work? Should you join? Many CEOs have also been facing workforce shortages: they get plenty of clients but not enough people to make them happy. Lots of companies had to change their business structure to better protect themselves from incursions by regulatory authorities, including foreign ones.
These challenges will be just as relevant in 2022. However, while in 2021 they caught us unawares, in 2022 we have enough time to prepare for the new realities. So what will 2022 bring for the Ukrainian IT sector and how can companies make the most of it this year? IT lawyer Maksim Nosarev, founder and CEO of Tretten Lawyers, shares his thoughts on the matter.
Challenge #1. Overloaded labor market
The Ukrainian IT industry is growing at an incredible pace, and COVID with all the lockdowns are only helping it along. Many companies (not just IT ones, but others as well) have been forced to work remotely, but they still want to retain control over their projects. This has pushed them toward embracing various IT technologies more rapidly.
The demand for IT products has increased. Businesses have accumulated enough resources to take on more projects. They have stepped up their recruitment efforts. Many of my clients describe the current market as “cutthroat”: large companies don’t think twice about poaching developers from smaller ones. Just recently, 10 people at once left one Kharkiv IT company for its larger competitor.
Specialists are getting more offers, so their price is going up accordingly. Industry wages are on the rise. Not all companies can afford this. In some, the situation is critical: people are leaving and there’s no one left to work on the projects.
This issue was affecting the decision making of IT founders and CEOs in 2021 the most. In 2022, it’s only going to escalate.
What this will lead to
- Very soon, it’s going to polarize the Ukrainian IT market. Large companies will suck as much human capital out of small and medium ones as they can. As a result, large business will get even larger. As for smaller fish, they are in for some hard times. Some will even be ousted from business, unable to compete.
- The trend of buying preexisting teams or whole companies is on the rise. There will be a significant spike in M&A deals.
- The numbers of foreign IT specialists in Ukraine will increase.
How to prepare
All players on the Ukrainian IT market will experience a shortage of developers and other specialists to some degree. So what every company needs right now is to become a more attractive employer. Alternatively, they could look for places with less demanding but equally qualified developers – and invite them to join. To do this, I’d recommend the following:
- Smartly revise the contracts with your people. Smooth out any rough edges that might discourage specialists from joining.
This isn’t me saying that you should get rid of important security clauses to get workers. But if you have something like $50k fines and other draconian clauses, you should make them less draconian and more balanced, more fitting to each particular situation.
- Consider hiring foreigners. In some countries, developers cost about the same as Ukrainian ones, if not less.
For instance, it’ll cost you less to find a specialist in Poland, pay for his relocation or for a well-written contract on remote work, and then pay him the market average salary than to hire a developer with similar qualifications in Ukraine.
The idea of relocating workers may scare some off, with all the bureaucratic hoops one would have to jump through in our migration services and embassies. However, law firms these days offer turnkey relocation services. With lawyers that have experience with these matters, your involvement in this as the employer will be minimal.
- Legal consultations for team members regarding their personal issues as a way to bolster the employer’s brand. After all, salary isn’t everything. You can get a subscription service from a law firm, allowing your workers to get first-hand consultations if they have any personal issues. If you’d like to find out more about this service, please contact us here.
If you get into a car accident, need to replace your water meter (yes, people come to us with this too), or buy a new house, it can be tough to find a trustworthy lawyer quickly. With the service above, your people will have easy access to lawyers that your company trusts. Compared to other typical investments in one’s brand, this one will definitely be appreciated by all.
Challenge #2. Launch of Diia City
Diia City as a special legal regime for the IT industry launches in 2022. And yet, despite all the buzz and discussion around it, it still remains a dark horse.
On December 14, the Parliament finally adopted a law with tax regulations for Diia City. As expected, it prescribes the following:
- option to pay capital tax – 9%;
- tax for individuals – 5%;
- single social tax of one minimum wage;
- military fee – 1,5%;
- ability to hire sole proprietors with a gradually increasing tax burden.
What this will lead to
No one really knows how all this is going to work and what consequences it’s going to have. On one hand, it all sounds good and promising. On the other, there are fears that Diia City lays the groundwork for a crackdown by the government on those who decide not to join. The powers that be claim that these fears are unfounded, but no one really knows for sure right now.
We stand ready to share our insight with owners and CEOs of IT companies on any issues concerning Diia City. Contact us here.
How to prepare
I would definitely recommend everyone to at least consider joining Diia City. As for those that have already decided against it, set up defenses in case of unhealthy attention from regulatory bodies.
- Those that will be joining should do a trial run first. For instance, if you have 100 workers right now, it’ll be safer to first register a legal entity and hire, say, a team of 15 developers (Diia City residency requires at least 9). Join Diia City with that legal entity and see how things go. If they go well, you can always increase your presence in Diia City by hiring more people.
If things don’t go as planned though, your risks won’t be as high, and the consequences for leaving not as painful. If, however, you join Diia City with your whole team from the get-go and later encounter problems – like changes in terms and legislation, or you’ll realize that it’s just not working out for you – you’ll find yourself in a difficult situation, since by that time you’ll have revealed yourself to the government as a company with a particular structure and number of employees. This could lead to more inspections after your exodus, as well as more taxes and other unpleasant fallout.
- Companies that don’t plan on joining Diia City and don’t have a secure business structure will be better off as a coworking.
- Companies with no plans to join that have already reorganized themselves into a coworking should conduct an audit to determine how well this structure fits their goals and processes.
Challenge #3. First reporting period on CFCs
Many IT businesses in Ukraine have foreign-based companies in their structure. They work under the rules of the country where they are registered, and pay taxes there as well.
Ukraine had been ignoring this for a long time. However, the global community has been fighting for transparent intentional taxation, and one of the goals here is putting an end to the use of foreign-based companies for tax avoidance. Ukraine as part of the global community has joined BEPS (base erosion and profit shifting) adopted by the OECD.
As part of this move, Ukraine has already implemented rules on CFCs (controlled foreign corporations). They are the same for all countries: CFC income is additionally taxed by the country where the person controlling the company has tax residency, in proportion to that person’s stake in the company.
The first CFC reports must be submitted in 2023 based on 2022 results. Therefore, many IT companies that have foreign components in their structure should already start preparing for these changes.
What this will lead to
In 2022, the IT industry will not feel the full brunt of CFC rules yet. Someone has already seen the signs and closed down or adjusted foreign companies within their business. Anticipating changes is the only proper course of action here.
Other owners of foreign-based subsidiaries are sure that this doesn’t concern them, so they aren’t getting ready to file reports and pay taxes under the new rules. I’d like to remind them that they will still have to report their CFCs to Ukrainian tax authorities even if they don’t conduct any business activities and don’t generate any income.
So I urge all IT entrepreneurs to consider CFC rules and assess their potential effect on their business – and restructure if necessary.
How to prepare
You can still rush to get rid of your CFCs, but it won’t save you – you’ll still have to file your 2022 report in 2023. There is still time, however, to restructure your CFC, redirect the cash flow, and change other things so it won’t be subject to CFC taxation. There is no universal solution here. At the bare minimum, you should discuss with your lawyers:
- whether your foreign-based companies are subject to CFC rules;
- if they are, will you have to pay extra taxes in Ukraine?
- is it economically viable to keep these companies in the form they are now?
- will it be more beneficial for you to restructure and do business solely in Ukraine?
Once you get answers to these questions, you’ll be able to make safe and beneficial business decisions.
These are the 3 main challenges that Ukraine’s IT industry will be facing in 2022. I hope everyone will overcome them with wisdom, class, and profit. May your business run smoothly!