Ukraine turns down exit capital tax. It will work in Diia City

Ukraine has signed a memorandum with the International Monetary Fund (IMF) in which it rejects an exit capital tax. This tax is one of the bonuses for the residents of Diia City, a taxation scheme to be launched in January. And it will not disappear, the Diia City team has promised. AIN.UA’s editorial office reports the details.

What has happened

On November 24, Ukraine received a $700 million tranche from the IMF and signed the Memorandum on Economic and Financial Policies. The document states that Ukraine will not substitute its corporate income tax with the exit capital tax.

“After a careful technical assessment, we will not move forward with substituting the current income tax for a exit capital tax (DPT),” the document says.

The problem is that DPT is one of the key benefits of the Diia City legal regime. It is offered to Diia City residents among the taxes they can choose from. The corresponding amendments are set out in bill No5376. By the time of signature of the Memorandum, it has not been adopted on second reading. Deputies will vote on the bill on December 2.

This has raised allegations that the provision on DPT can be removed from the document on short notice. But the Ministry of Economic Development says this will not happen, because the agreement with IMF does not apply to the Diia City regulations.

“Because we do not substitute the corporate profit tax for the exit capital tax, we offer residents of the special regime different taxation models to choose from. That is why the taxation part of Diia City remains unchanged,” the Ministry of Digital Transformation has replied.

How taxation will work in Diia City

Diia City is a legal regime that will apply to the Ukrainian IT industry. A company that meets the list of requirements can opt to become a Diia City resident. The specifics of the regime:

• Special regime residents can choose at their discretion which corporate tax to pay – a 9% exit capital tax (ECT) or an 18% income tax.
• Personal income in the form of dividends distributed by a resident company will be exempt from taxation on the condition of being paid out not more often than once every two years. There is a tax reduction envisaged for natural persons in case of buying a stake in a startup which is a Diia City resident.
• The income of employees and gig-workers of Diia City residents will be taxable: personal income tax – 5%, Social Security fee – 22% of minimum national wage, military tax – 1.5% (of an employee’s salary or a gig-worker’s remuneration). If a professional receives more than €240,000 per year, then all their income exceeding this limit will be taxed at the rate of 18% of the PIT.

Maxym Nosarev, an IT lawyer and the founder of Tretten Lawyers, says that the introduction of the exit capital tax is attractive for business. It allows companies to use more funds for their development and refinancing.

The legal expert explains how this works. A company has earned $100,000, and corporate income tax means that the percentage applies to the entire amount. In case the exit capital tax is introduced, the portion of the income which covers operating and development costs is not taxable. “Such taxation regime has been successfully applied, for example, in Estonia. And quite a few IT companies, including Ukrainian ones, now choose this country to register their offices there,” Nosarev says.

Why IMF is opposed to the exit capital tax

According to Anton Zaderyholova from the law firm AVELLUM, the main reason is a quest for stability. Corporate income tax guarantees regular budget revenues, and DPT is less predictable. Thus, this can affect Ukraine’s ability to settle its debt on time.

“In essence, DPT is the taxation of dividends. Not all companies plan to apply their undistributed income towards dividend payouts. Corporate income tax is a guaranteed budget revenue that directly correlates with GDP growth.

Ukraine has grave problems with access to fair justice and other macroeconomic problems, such as limited access to low-cost funds. The introduction of DPT is unlikely to attract new investors. The main objective, in my opinion, is not to lose the tax revenues which already exist,” the lawyer says.