Beyond the standard government response to a military invasion – a switch to martial law mode of operation, Ukraine has turned its IT industry into one of the key instruments to keep the country afloat. Since 24 February IT has done and continues to be extraordinarily successful in saving lives and defending homeland. People can rely on applications to swiftly inform them of air raids, satellite internet access ensures military and emergency communication. The one-stop-shop government platform collects donations, offers state-issued compensations, and provides other public services online. OSINT helps to investigate war crimes and detect criminals efficiently. Nowadays, a functioning IT industry proves to be a key pillar to a country in a state of war in an increasingly digital world.
In the recent years the IT industry in Ukraine has progressed at a steady pace as a part of the economic development of the country. Shortly before the war in response to the pandemic, the government created Diia.City – an optional legal and tax regime intended to facilitate and expand IT industry. Since the beginning of the war this foresight has allowed the country to lean on it and persevere in a spectacular manner. It is worth exploring the Ukrainian experience on keeping the life-saving IT industry functioning.
Default Safety Mechanisms
To begin with, Ukraine has introduced benefits and protection mechanisms that apply to local companies by default, regardless of industry and applicable special regimes:
- Draft exemptions. Ukrainian legal entities may apply for draft exemptions in order to prevent downtimes of activities that may be helpful for Ukraine. Draft exemptions must be approved by local authorities and relevant executive bodies of Ukraine, including the Ministry of Defense. Exemptions are applicable only to employees of Ukrainian legal entities.
- Internal company relocation. It is important to ensure that businesses may swiftly relocate their material assets to safer regions of the country with aid of the government. If government is willing to assist with relocation, in-country relocation may seem far more beneficial compared to leaving the country at once. Regional IT clusters and local authorities usually support any initiatives that may aid companies, including relocation assistance and approval of draft exemption lists mentioned above.
- Document management. During invasion, retaining hardcopies may be highly burdensome. Electronic document management with non-invasive requirements should be introduced, followed by the option to destroy any hardcopies in worst-case scenarios with minimized negative consequences. For example, if data on accrued salary was lost due to war, such period shall be excluded from average salary calculation to prevent unreasonable reduction thereof.
- Labor relations. Wartime conditions required adaptation of Ukrainian labor legislation. During martial law, a company may unilaterally suspend the operation of an employment agreement, announce downtime, or change significant working conditions. This allows reacting adequately if performance is temporarily disturbed due to war (e.g., announce downtime instead of employment termination).
In summary, an emergency framework must be responsive to both current and possible threats i.e., it should have the capacity in foresight to adapt to any black swan event. The current regulation in Ukraine has proved adequate and has allowed Ukrainian companies to keep functioning with no need to transfer operations abroad.
Diia.City is an optional legal and tax regime created by the government for the IT industry during the pandemic with the intent to facilitate investment and implantation of such businesses in Ukraine. It provides for an extensive list of benefits s, including the following:
- Gig-specialists. Diia.City allows residents to involve specialists under a special regime – a gig-contract that combines elements of an employment agreement and civil contract. It means that gig-specialists are invited to undertake specific projects rather than become a member of permanent staff. Nevertheless, that ensures basic social rights for specialists, the possibility to agree upon work conditions comfortable for both parties as well as transparency and modest taxes due by the residents. Gig-specialist is not required to gain entrepreneur status, meaning that such form of involvement is less burdensome. Diia.City residents though can opt for traditional formats of employment such as standard employment agreements or private entrepreneurs.
- Tax benefits. Diia.City guarantees its residents low tax rates. Herewith, labor taxes encompass 5% personal income tax, 22% of the minimum wage as Social Security fee as well as 1.5% military tax. The corporate tax provides only 9% exit capital tax or 18% income tax. Likewise, Diia.City regime provides for the facilitation of investments such as 0% on an individual's dividends under certain conditions and tax rebates.
- Non-Compete Agreement. Gig-specialists can sign a written remunerated Non-Compete Agreement and become obliged not to engage in competing activities with the former employer for 12 months after the termination of employment. Ukrainian legislation provides a quite extensive range of such activities from concluding contracts with alike companies to direct or indirect keeping of shares in other contesting companies.
- Accessibility of benefits. Recently Diia.City has faced some positive changes such as waiver of audit reports for a specified period, and extension of potential residents (those providing card payment systems solutions, or technological products for defense and industrial spheres). During martial law, both Diia.City residents and potential candidates will preserve their status as residents even if they fail to meet several residence criteria, such as the number of employees or average salary.
More details on Diia.City (e.g., comparison with similar regimes in other jurisdictions, intellectual property guarantees, etc.) may be found here.
Proof of Concept
Recent statistics on Diia.City residency prove that doing IT business via Ukrainian company is a viable option. Since the introduction of martial law in Ukraine on 24 February 2022, the operation of most state registries has been suspended – with one notable exception: Diia.City. Almost 150 international and Ukrainian companies have joined this legal and fiscal space between March and April 2022.
Among the new residents are AgriChain (software designer for agribusiness), Archivizer (developer of service for 3D-visualisations), Axdraft (contract lifecycle management platform), Bru.Digital (team of computer graphics artists, material specialists, designers), ISSP (cybersecurity and data management solutions services provider), Luxoft (enterprise technology services provider), MEGOGO (media service for video and TV streaming), Netcracker (BSS, OSS, SDN/NFV provider), PandaDoc (business software), Preply (educational online platform), Snap Inc. (social media) and others.
These spectacular results were achieved thanks to collective efforts of private and public sectors crafting a responsive legal framework, as well as developers desiring to continue work under Ukrainian flag. Suffering of Mariupol, Bucha, Irpin, Kherson, countless other cities expects no less from all involved parties. The Ukrainians are determined to forge a sustainable economy to match the efforts of countless volunteers that save lives on battlefields and at hospitals.
Diia.City was introduced during the pandemic and performs well during war. It embodies the creativity and resilience of the Ukrainians. Thank you for maintaining cooperation with Ukrainian developers, and if you have not established one yet – today seems like a perfect day to start.
Authors: Vitalii Meliankov, Associate, Daria-Oleksandra Zagorui, Junior Associate in cooperation with D’ORNANO PARTNERS
Published: D'ORNANO PARTNERS, 20 May 2022