On 24 May 2012 the Ukrainian MPs adopted the package of Laws of Ukraine aiming at encouraging the development and boosting the global competitiveness of Ukrainian IT industry (“the Laws”). The Laws have not been signed by the President of Ukraine, thus not taken effect, yet though the chances of it being signed in due course are considered quite high.
The Laws provide for a number of tax incentives for IT companies for ten years from 2013, namely:
- Reduction of corporate income tax rate for IT companies from 19% to 5%;
- Introduction of VAT exemption for domestic software sales (currently the domestic software trade is subject to 20% VAT);
- IT specialists employed with IT companies are subject to reduced personal income tax rate of 5% as compared to the current rates of 15% and 17%;
- Reduction of payroll tax burden on IT companies, namely the standard rate for the industry of 36.76% is now levied on the amount limited by two minimal statutory salaries as compared to the current cap of ten minimal statutory salaries. This incentive will be available for five years since 2013.
These tax benefits will extend only to IT companies which engage in types of activities listed in the, Laws. Moreover, these benefits will be awarded subject to (i) compliance with certain tax authorities’ registration criteria and (ii) obtaining an approval from the State Agency for science, innovation and informatisation.
There are concerns that the process of getting the required approval may become quite bureaucratic, thus many IT companies may face impediments in prompt shifting to beneficial tax regime.
Also, there are fears that the tax authorities may now start looking more rigorously into hidden employment issue which was not a hot topic in the previous years, but may become one after the mentioned benefits are introduced. Such fears, in fact, stem from the alleged governmental hesitation over the likely state budget losses that may be caused by the tax incentives, if introduced. Considering that the two thirds of the Ukrainian IT people are employed through civil law services contracts rather than through employment contracts the Government concerns should be taken seriously.
Laws: Law of Ukraine No. 8267 “On State Support of the Software Industry” dated May 24, 2012 and Law of Ukraine No. 9744 “On Introducing Amendments to the Tax Code of Ukraine Concerning Special Tax Regime for the Companies Operating in Software Industry” dated May 24, 2012.