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Ukrainian parliament votes for a special IT industry regime, known as Diia City. So far, the bill has passed the first reading

On April 15, 2021, in the first reading, the MPs adopted bill No. 4303 on stimulating the development of the digital economy in Ukraine. It is a project about a special legal framework for the IT industry called Diia City, which has been actively discussed in the community lately.

In a nutshell, Diia City is a special legal framework for Ukrainian IT companies that can apply to participate in it. The project’s duration is 15 years. Its key provisions include the following:

  • All companies wishing to become members of Diia City must submit applications. Then they are included in the register of residents of Diia City.
  • The concept of gig employees and gig contracts is introduced.
    • A resident of Diia City can conclude an agreement with an individual, according to which such a gig employee undertakes to perform the work specified by the company personally. This work will consist of tasks (gigs), projects, and orders of the employer or their gig employees. The employer undertakes to pay for the gig employees’ work and provide proper work conditions if the work is not performed remotely (a gig contract).
  • A special tax regime is being introduced for participating companies: personal income tax at 5%, single social security tax from the minimum salary, corporate tax with a choice of either an 18% tax on book profits or a 9% tax on distributed profits, and military tax at 1.5%.

The first version of the Diia City bill was criticized by many market participants, particularly for the risks of working with private entrepreneurs, for the too broad powers of the Ministry of Digital Transformation in terms of management of Diia City, etc. (details are here).

After that, the Ministry finalized the bill and presented an updated version in March 2021. We wrote about its key differences with the previous version earlier. But the IT community still had questions about the project, particularly about non-enticement and non-compete agreements (we wrote about this in more detail earlier).

Tax rates for resident companies of Diia City are described in a separate bill, which will be put to the vote in the first reading after bill No. 4303.

Why is it important: the bill will become the starting point for creating a special legal regime for the development of the IT industry in the country.

What’s next: The Ministry of Digital Transformation emphasizes that some of the amendments (for example, removing non-enticement and non-compete clause, which may complicate job changes for employees of participating companies) were not included in the draft, which was voted on April 15 in the parliament. The Ministry promised to remove them by the second reading. The updated text of the bill is not yet available.

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