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09 September 2020, 07:11
Special terms of taxation for the IT industry in Ukraine
We have #AtTheCommitteeConsideration Draft Laws No. 3979 and No. 3933,
which propose to create special conditions for the IT sector in Ukraine
by reducing the tax burden and bring it to a new level.
According to the Ukrainian digital company N-iX, the information and communication sector in Ukraine is growing by 26% each year. The number of companies in this area exceeds 4,000. And the number of professionals working in IT reaches almost 200 thousand people. This is despite the fact, that the terms of taxation for the IT sector in Ukraine are worse than in EU. In Ukraine IT companies pay 18% income tax, while in Estonia, for instance, the income tax rate for IT companies is 0%.
“The Ukrainian IT sector today is mostly a large outsourcing resource of IT services”, - IT experts say. IT ranks third in terms of IT exports and thus accounts for one-fifth of all Ukrainian service exports.
“Ukraine sells man-hours, it does not create products”, - Dmytro Chashnyk, the owner of Cobit Solutions main business of which is business intelligence says. He is convinced that investment management and tax changes can significantly improve the situation.
What is suggested by draft laws No. 3979 and No. 3933?
Draft law No. 3979 defines only general measures for providing incentives for the IT industry:
- special tax regime (does not specify the terms of taxation);
- the possibility to choose an employment contract while hired to work (current legislation does not provide for a contract for IT professionals).
Draft law No. 933 suggests more specific changes: in particular, to establish a special tax regime for IT companies for the period from January 1, 2021 to December 31, 2030:
• reduce the income tax rate from 18% to 9%;
• reduce the personal income tax rate from 18% to 5%;
• reduce the rate of the social tax from 22% to 5%;
• exempt employees of IT companies from paying military duty.
Which IT companies will be able to take advantage of these changes?
The draft law No. 3933 stipulates that the special tax regime will be available to businesses, which:
• receive at least 90% of their income from activities in the field of information technology;
• allocate at least 50% of their expenses to wages;
• do not have a tax debt;
• were not declared bankrupt.
The draft law No. 3979 suggests stricter conditions, in particular, to create a special register of IT companies and lists a number of requirements for who can be a subject of the IT industry:
• the legal entity must carry out only the activities in the IT industry;
• the average monthly salary of IT employees must be at least the equivalent of 1,500 Euro;
• the share of legal entity costs for the remuneration of employees of the IT industry in the overall structure of its costs should be not less than 70 percent;
• the amount of export revenue of the entity from the activities in the IT industry should be not less than 70 percent of its total income.
The authors of the draft law claim that in 2021, if the incentives for the IT industry are provided, about 80,000 new jobs will be created. By 2025, according to the authors of the draft laws, the creative industry market is expected to grow to $ 11.8 billion (compared to $ 6.2 billion in 2019).
According to the Ukrainian digital company N-iX, the information and communication sector in Ukraine is growing by 26% each year. The number of companies in this area exceeds 4,000. And the number of professionals working in IT reaches almost 200 thousand people. This is despite the fact, that the terms of taxation for the IT sector in Ukraine are worse than in EU. In Ukraine IT companies pay 18% income tax, while in Estonia, for instance, the income tax rate for IT companies is 0%.
“The Ukrainian IT sector today is mostly a large outsourcing resource of IT services”, - IT experts say. IT ranks third in terms of IT exports and thus accounts for one-fifth of all Ukrainian service exports.
“Ukraine sells man-hours, it does not create products”, - Dmytro Chashnyk, the owner of Cobit Solutions main business of which is business intelligence says. He is convinced that investment management and tax changes can significantly improve the situation.
What is suggested by draft laws No. 3979 and No. 3933?
Draft law No. 3979 defines only general measures for providing incentives for the IT industry:
- special tax regime (does not specify the terms of taxation);
- the possibility to choose an employment contract while hired to work (current legislation does not provide for a contract for IT professionals).
Draft law No. 933 suggests more specific changes: in particular, to establish a special tax regime for IT companies for the period from January 1, 2021 to December 31, 2030:
• reduce the income tax rate from 18% to 9%;
• reduce the personal income tax rate from 18% to 5%;
• reduce the rate of the social tax from 22% to 5%;
• exempt employees of IT companies from paying military duty.
Which IT companies will be able to take advantage of these changes?
The draft law No. 3933 stipulates that the special tax regime will be available to businesses, which:
• receive at least 90% of their income from activities in the field of information technology;
• allocate at least 50% of their expenses to wages;
• do not have a tax debt;
• were not declared bankrupt.
The draft law No. 3979 suggests stricter conditions, in particular, to create a special register of IT companies and lists a number of requirements for who can be a subject of the IT industry:
• the legal entity must carry out only the activities in the IT industry;
• the average monthly salary of IT employees must be at least the equivalent of 1,500 Euro;
• the share of legal entity costs for the remuneration of employees of the IT industry in the overall structure of its costs should be not less than 70 percent;
• the amount of export revenue of the entity from the activities in the IT industry should be not less than 70 percent of its total income.
The authors of the draft law claim that in 2021, if the incentives for the IT industry are provided, about 80,000 new jobs will be created. By 2025, according to the authors of the draft laws, the creative industry market is expected to grow to $ 11.8 billion (compared to $ 6.2 billion in 2019).