Obtaining the status of a Diia City resident unlocks new opportunities for companies, providing significant advantages in accounting and taxation. Lower tax rates allow businesses to reduce overall expenses. The use of gig contracts also impacts accounting by optimizing personnel costs and offering flexibility in reporting labor relations. This approach enhances investment attractiveness, particularly for rapidly growing companies.
Registration and Requirements for Diia City Residents
To become a Diia City resident, a company must complete the registration process through the portal and meet certain criteria:
- Engage in one or more activities specified by law, as outlined in the company’s charter or registered details. While most residents are IT companies, there are other eligible activities not directly related to IT.
- Starting from the month after obtaining residency, the average monthly compensation for employees and gig specialists must not be less than the hryvnia equivalent of €1,200, based on the NBU exchange rate on the first day of the respective month.
- The average monthly number of employees and gig specialists must be at least nine, starting from the month following the acquisition of residency status.
- The amount of qualified income of a legal entity received during the first three calendar months following the month in which the entity obtained Diia City residency status must be at least 90% of its total income for that period. Additionally, the amount of qualified income received for each calendar year during its Diia City residency must also constitute at least 90% of the legal entity’s total income for the same period.
- The legal entity must not have any circumstances specified by the legislation that would disqualify it. For instance, only legal entities registered in Ukraine can become residents. Furthermore, the entity must not have direct or indirect owners who are legal or natural persons from an aggressor state, must not be under sanctions and must not be in a state of liquidation, reorganization or bankruptcy, among other restrictions.
Startup-Specific Requirements:
- companies registered no more than 24 months before applying for residency;
- annual revenue must not exceed 1,167 minimum wages (approximately UAH 8.3 million in 2023).
If a company becomes a Diia.City resident under startup conditions, it must comply with the general requirements. However, it is exempt from meeting the criteria for minimum salary and average number of employees until December 31 of the calendar year following the year in which it obtained Diia.City residency status.
Registration is the initial step, after which the company is obligated to adhere to specific accounting rules. This requires submitting the necessary documentation and maintaining records of income, expenses and taxes in accordance with legal requirements. Since the taxation of Diia City residents has its own nuances, it is advisable to seek assistance from professionals, such as the experts at UHY-Prostir, for accounting and tax management.
Corporate Income Tax
Residents can choose to pay corporate income tax at the standard rate of 18% or opt for a special regime with a 9% tax on distributed profits. This means that tax is applied only to funds distributed to shareholders, while retained earnings within the company remain untaxed. Although the distributed profits tax has its advantages compared to the standard corporate income tax, there are certain limitations that must be considered.
For instance, Diia City residents working with entities on the simplified taxation system should account for the costs of acquiring goods, works and services from such taxpayers, as these expenses may be restricted.
Labor Taxes:
- Personal Income Tax (PIT) for gig specialists and employees is 5%, significantly lower than the standard rate of 18%.
- Unified Social Tax (UST) for gig specialists and employees is calculated based on the minimum wage, reducing the financial burden on the company.
To qualify for the preferential labor tax rates, residents must meet criteria regarding the average number of specialists and the size of their salaries/compensation.
The military tax remains unchanged at 1.5%, consistent with other businesses.
Diia City residents have the flexibility to choose models of cooperation with specialists: gig contracts, labor contracts or agreements with private entrepreneurs (PEs). The gig contract is a new form of engagement that offers flexible terms and simplifies personnel management for businesses. This format liberalizes labor relations with employees, reduces administrative burdens, and streamlines payroll accounting and reporting. Labor contracts and agreements with PEs have been widely used in Ukraine for a long time, and established practices already exist for their regulation.
Although the Diia City tax regime simplifies taxation, all residents are required to maintain accounting records in accordance with national or international standards adopted in Ukraine. This means companies must account for all transactions, income, expenses, assets and liabilities.
The special tax regime focuses on distributed profits, which simplifies financial reporting to some extent. However, residents are still required to submit standard financial statements as mandated by law. Additionally, it is important to note that Diia City residents are obligated to undergo audits.
Reporting
Diia City residents have specific reporting obligations.
On February 17, 2024, Resolution No. 163, adopted by the Ukrainian government, came into force. According to it, Diia City residents are required to annually submit a compliance report and an independent auditor’s opinion. These documents must be submitted to the Ministry of Digital Transformation.
In accordance with Article 13 (Part 4) of Law No. 1667, the compliance report must include the following elements:
- Confirmation of Diia City residency status and compliance with all requirements outlined in Article 5 of this Law.
- Information on the average monthly remuneration of employees and, if applicable, gig specialists, provided for each month of the reporting period.
- Data on the average number of employees and gig specialists for each month of the reporting period.
- Information on the share of qualified income in the total income of the resident during the reporting period.
- The amount of income earned, if the resident obtained status under Part 3 of Article 5 of Law No. 1667 and Clause 292.1.2 of the Tax Code, for the reporting period and the previous year.
The annual compliance report is prepared by the residents themselves, although they may involve external specialists. Responsibility for the information in the report lies with the resident’s director or an authorized representative acting on their behalf. Information about the responsible individual is entered into the Unified State Register of Legal Entities and Individual Entrepreneurs.
In addition to the compliance report, Diia City residents are required to submit an independent auditor’s opinion. This opinion is obtained from an auditing entity to verify the information in the compliance report.
Residents are also required to submit standard financial statements, including the balance sheet, income statement and corporate income tax declaration, within the deadlines established by law.
Advantages and Risks of Diia.City Residency Status
The Diia.City residency status offers significant advantages, including low tax rates and simplified accounting procedures. This allows companies to minimize administrative costs, as they are not required to meet all the complex requirements imposed on regular businesses. Additionally, residents can utilize gig contracts, which provide flexibility in labor relations and simplify the hiring process. The status enhances the company’s investment attractiveness, which is crucial for startups and businesses in the growth stage.
However, there are certain risks, such as the possibility of losing residency status if regulatory requirements are not met.
To minimize these risks, it is important to:
- Ensure compliance with all accounting and tax regulations.
- Collaborate with experienced accountants for proper bookkeeping and reporting, such as the specialists at UHY Prostir.
