Fri, Jun
53 New Articles

Ukrainе Incentivizes Investments In and Operation of IT-related and R&D Projects

Ukrainе Incentivizes Investments In and Operation of IT-related and R&D Projects

  • Smaller Small Medium Big Bigger
  • Default Helvetica Segoe Georgia Times

In 2021 Ukraine enacted a set of laws ("Diia City laws") aimed at introducing a legal framework as well as tax, social security, labour and certain other incentives for Ukrainian businesses that derive all or almost all their revenues from R&D and IT-related activities (also known as "DIIA CITY").

The new incentives driven by the Ministry of Digital Transformation of Ukraine should create a flexible legal framework and boost the technology-driven business in Ukraine. As recently reported (https://reports.itukraine.org.ua/en), in 2021, the Ukrainian IT industry grew by 36% from USD 5 billion to USD 6.8 billion in exports. At the same time, the number of specialists increased from 244 thousand to 285 thousand. Thus, over the past three years, the industry has more than doubled in exports and has grown by more than 50% in the number of specialists.

Thus, the rapid grow of the IT sector has led to the high demand for legislative changes, specifically factoring the high level of freelance, entrepreneurship and transactional activities.

The Diia City regime targets the main IT sectors: R&D, product and outsourcing, marketing and IT education. The relevant benefits and incentives  will be available for eligible Ukrainian companies that will get registered as Diia City residents.

To become a  Diia City resident, a business entity must:

  1. be registered under the laws of Ukraine;
  2. derive more than 90% of revenues from one or more prescribed R&D and IT-related activities;
  3. pay an average monthly remuneration of at least EUR1,200 to gig-contractors and employees;
  4. engage at least 9 gig-contractors and employees on a monthly basis.

To incentivise private investments in early stage R&D and IT-related projects, the Diia City laws provide for more lenient qualification requirements for startups.

The procedure for filing the application for the Diia City residency provides for submission of the application and its further review within 10 days period. Based on the results of the review, the application may be either granted or dismissed. Further, the Diia City residents shall submit compliance report accompanied by the respective audit on the sixth month of the Diia City residency and then will have to submit such report annually.

To secure sustainability and predictability, the Diia City laws explicitly provide that the regime is enacted for not less than 25 years as of the date of entry of the records about the first resident of Diia City in the register. It is expected that the program will be launched in February 2022.

In a nutshell, the main novelties relate to the models of engaging workforce, corporate, labour and tax aspects which are described below.


  • a legal entity may act as the director of Diia City resident – although it is applicable to the companies incorporated in a form of limited liability company or additional liability company.
  • the Diia City laws introduce a convertible loan instrument (loan agreement with alternative obligation), whereby in lieu of repayment of the loan owed by Diia City resident or upon occurrence of suspensive or subsequent condition, the creditor may request Diia City resident to procure entry of the creditor as its participant or increase its share in the share capital, if the creditor is already the participant of Diia City resident.
  • the Diia City laws clarified that the corporate agreement may be governed by foreign law (if there is a foreign shareholding) and option agreements in respect of shares in the charter capital of DIIA CITY residents are possible.

Flexible models for engaging workforces

The Diia City laws introduce a new type of agreement with IT-specialists: gig-contracts, which are a mixture of labour and civil-law agreements, thus creating a new category of workers such as gig-contractors.

Respectively, Diia City residents have several options to engage workforce: based on labour contract, gig-contract and other civil agreements.

The Diia City laws provide for the special requirements for gig-contracts, which adopted some principles of the labour agreements, including the following:

  • working hours are up to 8 hours per day, 40 hours per week;
  • there are such obligatory social benefits as e.g. sick leaves, maternity leaves, vacations, occupational safety guarantees, other benefits as envisaged by the Diia City laws;
  • gig-specialists could be obliged to follow all internal corporate policies.

Still, the relationship with gig-contractors does not fall under the labour law and is construed based on the principles of civil contracts with freelancers acting as independent contractors.

Yet another benefit is that no work permits for foreign gig-contractors are required, in contrast to engaging foreigners as employees.

Further important novelty is that non-compete agreements may be concluded between a Diia City resident and gig-specialists (this obligation can also be a part of the gig-contract), what is not possible under ordinary employment.

In the context of defining the model of engagement of the workforce, the following should be noted.

Ukrainian labour legislation is not flexible, employee-friendly and establish bureaucratic relationship which make it formal and rigid. And this is one of the reasons why labour relationship was not popular in the IT industry, where workforce was primarily engaged as freelancers. The gig-contracts should balance the system and help reducing a tax burden and eliminating the risks of re-classifying contractor relationship into employment. 

Tax incentives


The following persons can fiscally benefit from the Diia City incentives regime:

  1. Ukrainian companies that are registered as Diia City residents;
  2. employees and gig-contractors engaged by Diia City residents;
  3. individual shareholders of Diia City residents.

Corporate taxes – tax benefits for Diia City residents

Ukrainian companies that are registered as Diia City residents can either continue paying a "classical" CIT at a tax rate of 18%, or choose to pay a distributed profits tax ("DPT") at a tax rate of 9% (or 18% in certain limited circumstances).

Conceptually, a 9% DPT applies to actual or deemed dividend (profit) distributions.  Dividend distributions to and transactions with Diia City residents are exempt from the DPT.

If dividends  or other payments to non-residents are subject to a Ukrainian WHT at a regular rate of 15% (or at a reduced rate under the relevant double tax treaty), the Ukrainian WHT can be credited against the 9% DPT.

Personal taxes – tax benefits for employees and gig-contractors

The Diia City laws introduced privileged taxation of employees and gig-contractors engaged by Diia City residents. 

This incentivised tax regime almost mirrors taxation of freelancers who now pay a 5% unified tax and a fixed unified social security contribution (USSC) of UAH1,430 (circa EUR48) per month.

If a Diia City resident engages employees or gig-contractors, it will be their tax agent responsible for:

  1. deducting a PIT at a tax rate of 5% and a military levy at a rate of 1,5% from gross remuneration paid,
  2. remitting the deducted taxes to the budget, and
  3. reporting the deducted and remitted taxes to the Ukrainian tax authorities.

A Diia City resident will also be required to accrue and pay a fixed USSC of UAH1,430 (circa EUR48) per month for each engaged employee or GIG-contractor. This will be a tax cost of a Diia City resident.

If a Diia City resident engages freelancers who are registered as private entrepreneurs and pay a 5% unified tax, it will NOT be a tax agent of such freelancers. The latter will be required to pay a unified tax at a rate of 5% and a minimal USSC of UAH1,430 (circa EUR48) per month.

Starting from 2024, there will be certain restrictions for Diia City residents in respect of engaging freelancers.  But this restriction is not critical given that taxation of employees, gig-contractors and freelancers will gradually be the same. 

Personal taxes – tax benefits for individual shareholders

If an individual shareholder receives dividends from a Diia City resident that opted to pay a DPT, such dividends are exempt from Ukrainian PIT and military levy provided that they are paid once in 2 or more years.

The tax incentive referred to above is available to both resident and non-resident individuals who are shareholders of Diia City residents.

Resident individuals can also claim a tax deduction in respect of their expenses on the acquisition of shareholdings in:

  1. Ukrainian companies before they get registered as Diia City residents, or
  2. Diia City residents that meet certain requirements.

A tax deduction is limited to the amount of taxable dividends received by a resident individual in the relevant calendar year.

An unutilized tax deduction cannot be carried forward.

By Oleg Chayka, Partner, Anna Golubovska, Senior Associate, Alesya Pavlynska, Counsel, and Kateryna Oliinyk, Partner, Arzinger

Our Latest Issue