Date of publication: 31 January 2024
Andriy Lytvyn, Attorney at Law, Head of Kharkiv Office
Source: AIN.UA
In December 2023, the Cabinet of Ministers adopted the National Revenue Strategy for 2024-2030. This document outlines the general direction of tax and customs reforms for the next six years.
It is crucial to understand that this strategy serves as a roadmap for reforms in the tax and customs spheres. While it does not change the current legislation, it indicates the future legislative changes that Ukraine will implement by 2030, which will directly or indirectly affect everyone.
Taxes for IT Professionals
In the IT industry, there are several common options for cooperation between a company and its specialists. An IT professional can:
- Work under an employment contract as a hired employee;
- Cooperate under a gig-contract if the IT company is registered in “Дія.City”;
- Operate as an individual entrepreneur (IE) under the simplified taxation system and provide services to the IT company under contract.
Currently, the last two options are the most widespread and profitable for IT companies in terms of economy and risk: cooperation with an individual entrepreneur or a gig-specialist. If they cooperate with an individual entrepreneur, it is usually under the third group of the simplified taxation system. Such a specialist must pay a single tax amounting to 5% of income and a single social contribution of 22% of the minimum wage per month, which will be UAH 1,562 in 2024.
While some individual entrepreneurs opt for the second group, it is not suitable for all IT specialists. This is because the second group restricts the specialist to providing services only to Ukrainian citizens and other simplified taxpayers, excluding foreign companies. In this group, an individual entrepreneur pays a fixed tax amounting to 20% of the minimum wage per month, which will be UAH 1,420 in 2024.
For gig-specialists, the necessary payments are covered by the IT company itself. These payments are almost the same as for the third group and include personal income tax at the rate of 5%, a military levy at 1.5%, and a single social contribution at 22% of the minimum wage.
Reform of the Simplified Taxation System
According to the strategy, the reform of the simplified taxation system will begin no earlier than 2025. The National Revenue Strategy envisions the consolidation of the second and third groups of the simplified taxation system for individual entrepreneurs into a single group.
Individuals in this combined group will pay tax based on a differentiated rate scale ranging from 3% to 17%. The tax rate will depend on the amount of income received and the type of activity. The minimum rate of 3% will apply to trading activities, while the highest rate of 17% will apply to those providing services, particularly IT professionals. This approach aims to set tax rates according to the level of expenses incurred in conducting business activities. Those providing services typically incur fewer costs than those selling products, as they do not need to purchase goods for resale.
With this reform, the authorities aim to “encourage” taxpayers to “voluntarily” switch to the general taxation system. The highest tax rate, set to reach 17%, will not be implemented immediately but will be gradually increased over three years.
Additionally, it is anticipated that any changes to the tax rate for the third group of individual entrepreneurs providing IT services will likely prompt adjustments to the 5% tax rate for gig specialists. However, these changes will not occur immediately. Initially, the gap will remain for individual entrepreneurs, leading many to transition to “Дія.City”, where taxes will be lower. Over time, as the number of gig specialists increases significantly, similar to the trend with the individual entrepreneurs, their tax rate will also rise to 17%.
Tax Regime for “Дія.City” Residents
The National Strategy also addresses preferential income tax regimes for “Дія.City” resident companies, which currently enjoy a rate of 9%. The document cautiously suggests that this rate may need to be increased in the future.
However, the Ministry of Finance currently maintains that the National Strategy will not serve as a basis for revising the tax regimes of the “Дія.City” area favorable for IT companies.
How will the National Strategy impact the IT-companies?
The state intends to “voluntarily” compel everyone to switch to the general taxation system, which currently has a tax rate of 18%. Although this tax increase will be implemented gradually, enforcing it in a de facto mandatory manner could have negative consequences for Ukraineэs economy due to the potential outflow of specialists and IT businesses.
On the positive side, the National Strategy aims to fill the state budget with much-needed funds and focuses on strengthening the fight against corruption. It also aims to transform tax authorities into a European-style service.
The National Strategy serves as a roadmap, and a clearer picture will emerge in the future when authorities begin to propose relevant draft laws and implement plans. It is still too early to draw definitive conclusions about whether the planned changes will be beneficial and how they will impact the IT industry.
