The law was recently approved by parliament, and Diia City is, therefore, a reality. The Ministry of Digital Transformation says that the new law will bring tax benefits and more security to the Ukrainian IT sector.
The Ukrainian IT-sector is growing by 20 to 30 percent per year and has attracted attention from abroad. The sector has benefitted from an alluring tax regime, minimal regulation, and highly qualified workers, but the industry might soon become more organized.
Recently, Ukrainian President Volodymyr Zelensky signed the new law “On Stimulating the Development of the Digital Economy in Ukraine,” which will set up the digital framework Diia City to create even better conditions for the Ukrainian IT sector, such as providing a legal framework to protect the industry and low taxes, according to Ukrinform.
The law has been underway for a long time and has met some resistance, such as from the industry organization IT Ukraine, which told Ukrainenu that the law is unnecessary and that any governmental interference with the IT sector could do more damage than good.
“I think you have to be careful about changing things that already work,” told Constantine Vasuk, CEO for IT Ukraine, to Ukrainenu earlier.
Minister: It is a step forward
These worries are not shared by the Ministry of Digital Transformation of Ukraine. On the contrary, Minister Mykhailo Fedorov recently said that Diia City will reduce the tax burden for companies five-fold and create more stability for the sector.
“We want Ukraine to be known as a country with the best tax system, as a country of startups and large food companies, as a country where it is easy to do business. Diia City is a unique opportunity for our country to provide this. At the same time, we will support the system that is currently working; we will act as its advocates,” the Minister said.
“Today, the conditions available in Ukraine are not suitable for everyone, global companies also cannot enter, they do not trust the current system. Therefore, it was decided to create a virtual zone, which will extend to the whole country. Participation in it will be voluntary,” added David Arahamiya, a People’s Deputy and head of the Servant of the People faction, according to the government’s website.
Both have emphasized that the program is voluntary and that workers and IT companies can continue as always if they prefer to do so. Ukrainenu also previously interviewed Deputy Minister of Digital Transformation Oleksandr Bornyakov, who said:
“We have seen that enforcement agencies have tried to look at how they can pressure the sector to pay more in taxes or stress them to pay bribes. These are issues that we have seen before, and some are still experiencing, and that is something that we want to do something about. Our bill states, among other things, that we want to prevent such bodies from coming and taking the equipment of the IT companies because that is the very nerve in their business. Something else is that the tax authorities can not just come and do checkups on the companies all the time as they can today,” he said.
We can pay more in taxes
According to the bill, Diia City will have a five percent income tax but additional taxes for social assistance and the military. In addition, Diia City will, among other things, introduce a zero percent tax on income if the amount is instead invested in a Ukrainian startup company. In addition, Diia City will give its “residents” a special status, which will protect them from corruption and investigations from, among other things, tax organs.
While that all sounds great, IT Ukraine fears that taxes will increase over time. Ukrainian freelance IT workers already pay a low 5 percent income tax in Ukraine, much lower than the regular income tax of about 18 percent. However, several politicians are interested in increasing that tax to 10 or 15 percent for IT workers.
Andreas Flodström, founder and CEO of the Swedish IT company Beetroot in Ukraine, recently told Ukrainenu that he has mixed opinions about Diia City.
“I have somewhat mixed views. I think there is an open dialogue between the industry and the ministry, and I am sure they have the industry’s best interests in mind. The industry is often opposed to change, but I am still optimistic, but I share the concern about whether there will be too much regulation,” he said.
“Many IT staff are moving from Ukraine because of the poorer health insurance, schools, and bad roads, so I do not see a problem in if the tax rises a bit to 10 or 15 percent so that the country can develop. But it must be the same for everyone without the opportunity to cheat,” said Flodström.