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Ukraine: Diia City – A New Legislative Framework for IT Companies During the War

Ukraine: Diia City – A New Legislative Framework for IT Companies During the War

Issue 9.10
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Despite the Russian full-scale invasion of Ukraine, IT remains one of the leading industries in the country. According to surveys, a bit more than 10% of IT specialists (mostly women, since a large part of men are not allowed to leave the country) have moved to other countries since the start of the invasion. Some of them were relocated to foreign offices of international IT companies or started working for foreign companies, while others keep working remotely for their Ukrainian employers.

Right before the invasion, a new legal framework for IT businesses, called Diia City, much discussed and awaited, was launched in Ukraine. The first residents were officially admitted on February 15, 2022. When Diia City was still discussed and the law was passed, there were fears that IT companies would not wish to join it at all, nor use its revolutionary legal concepts, such as gig-contracts, as it was something new for them, while they were fine with existing models.

Practice showed that, even in times of active war, businesses wish to join Diia City. Some choose to create separate legal entities to enter it. By February 22, 2022, just two days before the start of the Russian full-scale invasion, 74 companies had already become its residents. On February 28, several days from the start of the invasion, new residents were admitted. As of October 2, 2022, the register of Diia City contains 368 companies.

Diia City was designed to attract IT businesses, many of which had been engaging IT specialists as individual entrepreneurs, with a better taxation regime and more flexibility compared to traditional employment. However, such a model of cooperation created risks for businesses from a tax and employment law perspective. As a solution, Diia City offered its residents a choice between employment and a “gig-contract” model, while offering a level of taxation close to the one used by individual entrepreneurs – both for employees and gig-contractors working for residents of Diia City.

Employees of residents in Diia City can be engaged based on employment contracts, which are a special type of employment agreement under Ukrainian law, allowing more options (e.g., additional grounds for dismissal) when compared to regular employment agreements. Besides taxation, an employment contract in Diia City is regulated as any other employment contract in Ukraine.

Meanwhile, Diia City residents have started using gig-contracts when engaging IT specialists. As a new concept in Ukrainian law, it took companies and their counsels a while to develop the respective templates. Many IT specialists had been raising concerns about concluding such contracts, but it seems that those were mostly caused by a lack of information. Essentially, a gig-contract combines a civil law contract with certain preferences (mainly for a gig-specialist) of an employment contract. For instance, the amount and terms of payment of remuneration to gig-specialists can be freely defined in a gig-contract (the requirements regarding average remuneration for a resident of Diia City still apply), while terms of payment of the salary to employees are set forth by legislation and minimum salary applies. On the upside for gig-specialists, they benefit from social guarantees similar to those of employees (like annual paid leave, sick leave, maternity leave, etc.).

The most controversial aspect of contracts with residents of Diia City is the possibility to conclude non-compete agreements. Previously, such agreements were not envisaged by Ukrainian legislation, although they were concluded in practice, and the law did not set forth any requirements for them. The law on Diia City requires that such an agreement concluded by its resident shall define, inter alia, the term of the non-compete obligation (which shall not exceed 12 months after termination of the main contract), territory, exhaustive list of competitive actions/competitors, and remuneration for the conclusion of such an agreement.

That is to say, the conclusion of a gig-contract requires a certain degree of maturity from both parties to the contract. And, while it has always been normal for companies to engage external advisors when developing/revising contracts, most employees in Ukraine are not used to seeking legal advice before concluding a contract. Changing this pattern would allow many of them to avoid unpleasant surprises in future cooperation with the companies they are working for, especially since gig-contracts allow much flexibility in their terms.

The regime of Diia City seems to be attractive for businesses now. But only practice will show whether this trend will remain and whether Diia City becomes a real game changer for the industry.

By Taras Utiralov, Partner and Director for Ukraine, Peterka & Partners

This Article was originally published in Issue 9.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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