Ukraine’s parliament, the Verkhovna Rada, has passed a key bill in of support Diia City, a special “economic zone” set up for the taxation, legislation and employment benefits tailored for local and foreign tech firms. The bill has created a lot of controversy, with many in the tech community opposed to Diia City.
A total of 262 lawmakers endorsed the bill in the final reading on July 15. Now the parliament has to amend the tax code to fully enact the bill. Lawmakers will vote for the amendments this fall, the Ministry of Digital Transformation told the Kyiv Post.
Ukrainian and foreign tech companies can join and leave Diia City at will. It doesn’t replace the current system where tech specialists pay a favorable 5% revenue tax if they’re registered as private entrepreneurs. The government promises that it won’t change the current version of the bill for the next 25 years.
Diia City will accept tech specialists that develop software and computer games, work with virtual assets and robotics, provide cybersecurity services, own e-sports businesses or create digital ads. The government will expand this list in the future. The average salary of an employee in Diia City will be nearly $1,400 a month.
Members of Diia City will pay a 5% income tax, 1.5% military tax, a reduced social security contribution that is currently $48 and either 18% or 9% corporate tax. Now companies pay 41.5% of taxes if they work with full-time employees, rather than individual entrepreneurs.
Businesses are free to choose how to employ their workers: with employment contracts that offer social benefits and are regulated by Ukraine’s labor code; as individual entrepreneurs or as gig-workers, the new tech employment category.
Gig workers don’t have to register as individual entrepreneurs and they are not regulated by labor law. Their working conditions are determined by gig contracts between tech specialists and employers. Compared to employment contracts that remain valid even after residents leave Diia City, gig contracts expire three months after workers depart the economic zone.
Fedorov said that Diia City will attract foreign investment and help Ukrainian tech companies to secure 10% of the country’s gross domestic product, compared to 4% today. Among tech companies, opinions are divided.
Ahead of the parliament meeting, on July 13, Ukrainian tech specialists in Kyiv, Dnipro and Kharkiv came to the street to protest against the bill. They compared Diia City to kolkhoz and slavery. Many specialists said that only big companies would prosper in Diia City, while ordinary techies will suffer and move abroad. Protestors repeatedly said that the government shouldn’t change a system that isn’t broken. Nearly 25,500 tech specialists signed a petition against Diia City.
IT Ukraine Association told the Kyiv Post that the bill “didn’t take into account all the requirements of the tech community.”
Among these requirements are: to allow individual tech entrepreneurs to create an independent association inside Diia City, recall the requirement to audit startups and small tech businesses and retain the current taxation of IT companies. IT Ukraine Association calls Diia City an unprecedented experiment, so the bill that supports it must be reasonable, it said.
Those who voted for Diia City said that the project is actually good for companies who want to scale their business and work with foreign partners. Many Ukrainian tech businesses now struggle to explain to foreign investors that individual entrepreneurs, the most popular employment model in Ukrainian tech, are legal and transparent entities in Ukraine.
Among the big Ukrainian companies backing the bill are telecommunication firm Kyivstar, the largest tech company EPAM, investment funds like Digital Future and BeeVentures, and startups like Reface and Ajax Systems.
Global analyst Oxford Economics concluded that Diia City will boost the development of the digital economy in Ukraine. According to its survey, Diia City is consistent with the requirements of the International Monetary Fund: it makes the market more transparent and strengthens the protection of property rights.
