Ukrainian IT sector has been growing for approximately 25 % a year for several
years now and currently generates approximately 5,4 billion dollars of turnover
per year. There are approximately 150 000 IT professionals working in the
sector, most of whom are registered as individual entrepreneurs and work
according to contractual agreements. The individual entrepreneur status enables
IT workers to pay 5 % of their turnover in taxes. This is of course very low
compared to most countries. In fact, in most countries these contractual
arrangements would in most cases be recognized as employment relationships and
normal payroll tax would apply to them. This special arrangement in Ukraine is
a huge part of what has enabled the IT sector to grow so fast.
salaries in the IT sector are high and taxes low, the current arrangement is
seen as contributing to income inequality in the country. Partly for this
reason the Ukrainian government is developing a new framework for the IT
sector. Most likely this arrangement will bring more IT professionals under a
payroll tax regime, thus increasing the country´s tax income. The government is
developing a legal framework called “Dija City” which would be a special regime
for IT individuals and enterprises. Its residents would be liable for payroll
taxes at 5 % and 9 % instead of the usual 18 % applicable to other businesses.
Additionally it would have some special employment conditions, IP protection
arrangements and other specifics. The government aims to implement this regime
in 2021 and expects it to boost the IT sector´s development and turnover
further, up to over 11 billion dollars in 2025.
not this initiative will be successful is yet to be seen. Even though the
arrangement would result in more tax income for the government, the
initiative´s critics point out that it would still mean an unequal payroll tax
regime between the IT sector and other sectors of the economy. For the Ukrainian
government, this seems to be a balancing act where it recognizes that the IT
sector is operating to different rules currently which results in a loss of
potential tax income. On the other hand, those rules are the main part of what
has enabled the sector to grow so fast. Professionals in the IT sector are very
mobile, and demand for them abroad is high. If new taxes result in loss of
income and living standards for IT professionals, more of them may consider
moving to work in more developed economies in Europe and further abroad.
For more information, see https://eurofast.eu/2021/02/03/ukraine-develops-new-legal-framework-for-the-it-industry/
We will send you articles keeping you up to date with the latest trends and developments in accounting, taxation or legal fields.