For years, Ukrainian technology companies worked largely unhindered, to the advantage of the industry.
But now the government is trying to intervene, promising to make Ukraine’s tech sector more prosperous and successful.
In 2020, the Ministry of Digital Transformation introduced a project called Diia City, an economic zone with taxation, legislation and employment benefits tailored for local and foreign tech firms.
Ukrainian techies are suspicious of the project and overtly criticize it. They say that the government shouldn’t change a system that works.
Minister of Digital Transformation Mykhailo Fedorov said he understands the concerns and doesn’t want to create burdens for tech businesses. However, he expects his ideas to help attract more money to the industry and open the Ukrainian information technology market to foreign investors.
During an online conference on April 5, he presented the improved version of the Diia City bill, after making “dozens of amendments.” The local industry said that the bill is not perfect and still needs many changes.
Option, not substitute
Diia City is like a virtual country for people who work in the information technology sector.
It promises many benefits to its residents: low taxes, easy employment, access to foreign investment and protection from the scrutiny of law enforcement agencies.
Although the project seems enticing, many companies are reluctant to join it. They think that the government will overregulate the industry and won’t allow techies to work as individual entrepreneurs.
For the last 20 years, nearly 90% of the local IT industry has hired tech specialists as individual entrepreneurs, said Dmytro Ovcharenko, a legal tech expert. It allowed them to pay just 5% income tax, compared to 18% that ordinary workers pay.
Fedorov boasts that residents of Diia City will pay 5% income tax and a reduced social security contribution compared to the rest of the country. Diia City also wants to reduce corporate tax from 18% to 9%.
That doesn’t change much for techies registered as individual entrepreneurs, Ovcharenko said.
Ukraine’s Ministry of Finance told the Kyiv Post that it will support the reduction of taxes if the income of tech specialists is no lower than $2,149 a month. During the presentation, Fedorov said that the average salary of a programmer in Ukraine is $721 per month.
According to Finance Ministry, the reduction of income taxes could stop the emigration of tech specialists and eventually, would increase the flow of money to the state budget.
Some companies are also worried that the ministry will make residents of Diia City pay unjustified fees, according to Olexander Hraban, head of Ukrainian tech company SimCorp. Ovcharenko said corruption may strike when residents want to leave or enter Diia City.
After the industry voiced these concerns, the ministry amended the bill.
Residency in Diia City was made optional, letting people join or leave the economic zone at will. Businesses are free to choose how to employ their workers: with employment contracts that offer social benefits and are regulated by Ukraine’s labor code; as individual entrepreneurs or as gig-workers, the new tech employment category.
The so-called gig contracts “offer workers the flexibility of freelancers and additional social guarantees,” said Olexandr Bornyakov, deputy digital transformation minister.
Gig workers don’t have to register as individual entrepreneurs and they are not regulated by labor law. Their working conditions are determined by gig contracts between tech specialists and employers.
Compared to employment contracts that remain valid even after residents leave Diia City, gig contracts expire three months after workers depart the economic zone.
Ukraine’s government hasn’t been successful in regulating the gig economy, which is why tech businesses do not trust gig contracts. They want to be able to keep working with individual entrepreneurs.
Protection, not regulation
The bill promises to protect residents of Diia City from searches and unjustified scrutiny from law enforcement.
The Security Service of Ukraine has been known to frequently search Ukrainian companies’ offices, allegedly to fight terrorism and tax evasion. Ukraine’s tech and legal experts said that most of these searches were groundless and undermined Ukraine’s image among foreign investors.
Fedorov’s Ministry wants to amend Ukraine’s criminal law to protect companies from unjustified inspections and seizure of equipment.
According to the bill, law enforcement bodies will be prosecuted for abusing their power within Diia City.
But tech companies still worry that the authority of the Digital Transformation Ministry in Diia City is too strong. For instance, the Ministry requires submitting annual reports to check whether the company meets Diia City residency requirements.
These reports have to be revised by independent auditors but the bill doesn’t explain how much power the auditors will have.
Uncertain future
Although the Diia City bill is controversial, many Ukrainian companies and startups have supported it.
“Diia City is an interesting and promising project,” said Hraban.
“If the project considers all recommendations from the business, then the government won’t abuse it and the industry will get a modern tool for the development,” said Yuriy Antoniuk, CEO of Ukrainian tech company Epam. According to Antoniuk, Epam will join Diia City if it’s created.
The founder of buzzy Ukrainian startup Reface, Dmytro Schvets, also promised to become a resident of Diia City.
Like other Ukraine-founded tech startups, Reface is now registered in the U.S. To grow in Ukraine, the company needs a different business environment.
Schvets said that if Reface becomes a resident of Diia City, he will be ready to employ gig-workers rather than individual entrepreneurs. Before that, the company struggled to explain to foreign investors that individual entrepreneurs are legal and transparent entities in Ukraine.
Ukrainian esports entrepreneur Alexander Kokhanovskyy also supports Diia City. He wants to raise $100 million to turn the country into a “Mecca for esports” but to give him money, foreign investors have to trust Ukrainian businesses.
Discussions about the future of Diia City will continue, experts said. According to Antoniuk, the Ministry still has to develop a separate bill to regulate taxes and labor in the economic zone.
For now, Ukraine’s tech sector is staying cautious.
There are not many successful cases of state regulation of the industry, which is aware of risks, Antoniuk said.
