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New legal framework being developed for the IT sector in Ukraine

The 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.

As the 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.

Whether or 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.

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