Business met with the Minister of Digital Transformation

24/ 03/ 2021

On March 23, the IT business community of the European Business met with Mykhailo Fedorov, Deputy Prime Minister, Minister of Digital Transformation of Ukraine. The meeting was entirely devoted to discussing the most resonant issue of the last year - the Diia.City initiative. In their appeals, representatives of IT companies stressed that many changes on the initiative have already been achieved due to the timely inclusion of Mikhail Fedorov in all operational processes of the project. Nevertheless, the two most acute and not-enough-elaborated issues remain: 1. (Optional) self-regulatory organization (SRO) for Diia.City residents. Thanks to the close cooperation of the industry and the authors of the draft law, it was possible to ensure that SRO is optional, and not mandatory for all residents as it was provided before. However, members of the IT community see risks in enshrining such, albeit optional, integration in the Diia.City Law. The main concern is the possibility of eventually making the SRO mandatory for all residents. Given that the draft law directly prescribes the SRO establishment, it will be very easy to change its format. This, in turn, may carry the risks of over-regulation of residents and, de facto, additional indirect tax burden. After all, under current legislation, now it is also possible to create the same self-regulatory residents organization Diia.City outside the context of draft law 4303-d, which will be on a truly optional basis and will be able to develop the IT industry in tandem with existing organizations. The EBA IT community considers that the logical solution is to eliminate this SRO in the text of the draft law in order to minimize possible risks. 2. Introduction of withdrawn capital tax for residents. In general, the idea of introducing such a new tax is supported by the industry. After all, such a tool is really popular in other countries (for example, Estonia, Georgia, Latvia) which can help business development as a mechanism of reinvestment. However, at present such a concept in the proposed version is difficult to implement in a relatively short time. There are also risks that the transition period of two years provided for in draft law 4303-d in the context of “gig contracts” may also be imperfect: a significant regulatory framework needs to be changed. It is worth reminding that tax on withdrawn capital will be imposed on operations with FOP. In such a way in case of a negative scenario, the industry may encounter a situation when in 2 years the gigs will not be finalized, and the industry that will be residents of Diia.City has to choose between two options: interact with FOP (but with + 9% withdrawn capital tax burden) or switch to the terms of the current Labor Code. Surely, we do expect the best-case scenario, but when it comes to maintaining and stimulating the development of the IT business, it is important to minimize possible future risks. Therefore, the industry sees two possible ways out of this situation: extending the transition period for the introduction of gig to 3 years and providing companies with a choice between a withdrawn capital tax rate of 9% and the existing income tax, at a rate of 9%. This solution will give enough time to finalize all issues related to gig contracts and the tax on withdrawn capital, without being held hostage to time. The European Business Association thanks the Deputy Prime Minister, Minister of Digital Transformation of Ukraine for openness to dialogue and long-term cooperation on the initiative. We hope that together we will be able to create a truly groundbreaking project that will allow the industry to develop because the overall idea does look very promising. Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

In their appeals, representatives of IT companies stressed that many changes on the initiative have already been achieved due to the timely “inclusion” of Mikhail Fedorov in all operational processes of the project. Nevertheless, the two most acute and not-enough-elaborated issues remain:

1. (Optional) self-regulatory organization (SRO) for Diia.City residents.

Thanks to the close cooperation of the industry and the authors of the draft law, it was possible to ensure that SRO is optional, and not mandatory for all residents as it was provided before. However, members of the IT community see risks in enshrining such, albeit optional, integration in the Diia.City Law. The main concern is the possibility of eventually making the SRO mandatory for all residents. Given that the draft law directly prescribes the SRO establishment, it will be very easy to change its format. This, in turn, may carry the risks of over-regulation of residents and, de facto, additional indirect tax burden. After all, under current legislation, now it is also possible to create the same self-regulatory residents’ organization Diia.City outside the context of draft law 4303-d, which will be on a truly optional basis and will be able to develop the IT industry in tandem with existing organizations. The EBA IT community considers that the logical solution is to eliminate this SRO in the text of the draft law in order to minimize possible risks.

2. Introduction of withdrawn capital tax for residents.

In general, the idea of introducing such a new tax is supported by the industry. After all, such a tool is really popular in other countries (for example, Estonia, Georgia, Latvia) which can help business development as a mechanism of reinvestment. However, at present such a concept in the proposed version is difficult to implement in a relatively short time. There are also risks that the transition period of two years provided for in draft law 4303-d in the context of “gig contracts” may also be imperfect: a significant regulatory framework needs to be changed.

It is worth reminding that tax on withdrawn capital will be imposed on operations with FOP. In such a way in case of a negative scenario, the industry may encounter a situation when in 2 years the “gigs” will not be finalized, and the industry that will be residents of Diia.City has to choose between two options: interact with FOP (but with + 9% withdrawn capital tax burden) or switch to the terms of the current Labor Code. Surely, we do expect the best-case scenario, but when it comes to maintaining and stimulating the development of the IT business, it is important to minimize possible future risks. Therefore, the industry sees two possible ways out of this situation: extending the transition period for the introduction of “gig” to 3 years and providing companies with a choice between a withdrawn capital tax rate of 9% and the existing income tax, at a rate of 9%. This solution will give enough time to finalize all issues related to “gig contracts” and the tax on withdrawn capital, without being held hostage to time.

The European Business Association thanks the Deputy Prime Minister, Minister of Digital Transformation of Ukraine for openness to dialogue and long-term cooperation on the initiative. We hope that together we will be able to create a truly groundbreaking project that will allow the industry to develop because the overall idea does look very promising.

Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.