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Publication date: 19.05.2024
Lawyer
Diia.City: a vision of the IT future of Ukraine and its impact on the national income strategy until 2030
### Introduction to Diia.City
Introduced on February 8, 2022, just two weeks before the full-scale invasion of Ukraine, Diia.City's special tax regime became a cornerstone for the country's IT sector. Over the past two years, despite significant challenges, Diia.City has attracted more than 800 resident companies employing around 62,000 IT professionals. As the Ukrainian government assesses the future of the tax benefits available to IT businesses under this regime, the wider implications for the National Income Strategy 2030 become acute.
### The genesis and success of Diia.City
The creation of Diia.City is a strategic step to support the IT industry of Ukraine by creating a favorable tax environment. The December 2023 issue of Forbes details Diia.City's journey and achievements, highlighting its resilience and growth even in the face of war. It is noteworthy that Taras Kytsmey, co-founder and board member of SoftServe, was one of the first to sign a contract for a concert under this mode after a year of thorough testing.
### National income strategy until 2030
The National Income Strategy (NSD) until 2030, approved by the Cabinet of Ministers, contains a comprehensive plan for Ukraine to achieve economic self-sufficiency. Among the key aspects of the strategy are the modernization of the tax and customs services, the reform of the simplified taxation system and the review of special taxation regimes, such as Diia.City. This strategy is consistent with the requirements of the International Monetary Fund (IMF) to increase domestic sources of income within the framework of Ukraine's financial program.
### Impact of Diia.City on national income
NSD emphasizes the need to review tax incentives to ensure their effective contribution to national income. Diia.City with targeted tax incentives is being tested for long-term viability and impact on the state budget. The strategy involves moving to a more inclusive and favorable tax policy, potentially reducing or eliminating specific incentives that may not significantly influence investment decisions.
### Reform of the simplified taxation system
NSZU plans significant reforms of the simplified taxation system (SST), which currently supports about 1.7 million taxpayers, including many IT service providers in Diia.City.
The reforms are aimed at:
- Gradual increase of tax rates for legal entities of the third group to the general income tax rate (18%).
- To combine the second and third groups of ESSV for individual entrepreneurs by introducing a differentiated scale of rates from 3% to 17%.
- Review the activities of the first group to exclude highly profitable enterprises and introduce a rate based on actual income.
These changes aim to prevent the misuse of SRS by large businesses and ensure fair tax contributions across all sectors.
### Assessment of special taxation regimes
The government's strategy involves re-evaluating the effectiveness of tax incentives in regimes such as Diia.City and industrial parks. The presence of such incentives must clearly influence investment decisions to justify their continuation. The NSD offers a potential alternative to the immediate depreciation rules for critical assets, which can offer more universal tax benefits without the disadvantages of narrowly targeted incentives.
### Future focus and conclusion
NSD prioritizes transparent, fair and efficient tax policy to support economic recovery and growth of Ukraine. Although the Diia.City regime has made significant contributions to the sustainability of the IT sector, its long-term role will be judged against broader national income goals. The government's commitment to a balanced approach is aimed at promoting a conducive business environment while ensuring sustainable revenue generation.
As Ukraine moves towards economic stability, strategic decisions regarding Diia.City and other tax regimes will be critical. By aligning these policies with national income goals, Ukraine can increase its economic resilience and chart a prosperous future for its IT industry and economy as a whole.
