Ukraine: Diia City: Special Tax Regime for IT Companies. What Changes in Practice?

When people talk about Diia City, the most commonly cited benefits are tax-related: a 5% personal income tax (PIT) rate, special rules for unified social contribution (USC) payments, and the ability to use gig contracts.

But for businesses, Diia City is more than just lower taxes. It is a distinct model for organising relationships with specialists, calculating and administering remuneration, managing HR, and ensuring tax compliance.

And that is where things get interesting.

 

What is Diia City?

Diia City is a special legal and tax regime established for companies operating in the IT and digital economy sector in Ukraine. Its primary legislative basis is the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” dated 15 July 2021, No. 1667 (hereinafter — Law No. 1667).

Under the provisions of Law No. 1667, a legal entity registered in Ukraine in accordance with Ukrainian law may obtain Diia City resident status — regardless of its location or place of business — provided it meets, among other requirements, the following criteria:

1. The average monthly remuneration paid to engaged employees and gig specialists, starting from the calendar month following the month in which Diia City resident status was obtained, must amount to at least the equivalent of EUR 1,200 each calendar month, calculated at the official UAH/EUR exchange rate set by the National Bank of Ukraine as of the first day of the relevant calendar month (Article 5(1)(2) of Law No. 1667);
2. The average headcount of employees and gig specialists (where engaged) must be at least nine persons per calendar month, beginning with the month following the month in which Diia City resident status was obtained (Article 5(1)(3) of Law No. 1667).

A legal entity that has had a tax debt — where the total amount exceeds ten minimum wages (based on the minimum wage established as of 1 January of the current calendar year) — for more than 30 days cannot obtain Diia City resident status (Article 5(2)(10) of Law No. 1667).

The Diia City special regime allows companies that meet the statutory requirements to benefit from a special taxation model for specialists’ income and to choose more flexible forms of cooperation with their teams. A Diia City resident may engage employees under employment contracts, gig specialists under gig contracts, sole traders (FOP), and other contractors.

For international companies, this can also be an attractive alternative to the traditional model of building an IT team in Ukraine.

What are the tax benefits?

One of the key advantages of Diia City is the special taxation of income received by employees and gig specialists.

Where the statutory criteria are met, the following rates apply:

• 5% PIT, instead of 18%;
• 5% military levy;
• USC — 22% of the minimum wage, regardless of actual income. As of the date of this article, the USC amounts to UAH 1,902.34 per month, calculated on a base of UAH 8,647.

For a company with a large number of highly paid IT specialists, the difference in taxation of a gig specialist’s income — and the USC burden on the company — compared to the standard employment model can be substantial.

But the words “where the statutory criteria are met” are of fundamental importance.

Obtaining Diia City resident status is not enough

Once a company has obtained Diia City resident status, it must continue to monitor ongoing compliance with the established requirements.

This means that the Diia City question does not end on the day resident status is granted. On the contrary — from that moment, ongoing compliance begins: the company must monitor its revenue structure, headcount, remuneration levels, types of activity, and other criteria upon which the right to use the special regime depends.

And those criteria directly affect how remuneration is calculated.

Remuneration administration under Diia City has its own rules 

At first glance, the formula seems straightforward: remuneration × applicable tax rate. In practice, administering remuneration is a more complex process.

Within a single company, full-time employees, gig specialists, and sole traders may all work simultaneously. Over the course of a month, various types of payments arise: salary, gig remuneration, bonuses, holiday pay, sick pay, compensation, insurance, additional benefits, termination payments, and others.

The key question is: can the Diia City special tax regime be applied to each of these payments?

Not always. A telling example is the payment of annual paid leave to a gig specialist. Previously, the approach to taxing such a payment depended largely on how it was defined in the gig contract and whether it was included as part of the gig specialist’s remuneration. At that time, the State Tax Service (STS) clarified that annual leave pay could be subject to 5% PIT if, under the terms of the gig contract, the payment was included in the gig specialist’s remuneration for the relevant service period and paid as part of that remuneration.

However, the current STS position is more conservative. The STS now states that costs incurred by a Diia City resident in connection with paying a gig specialist’s annual paid leave do not constitute remuneration for work performed (services rendered) during the month. Accordingly, the special 5% PIT rate applicable to gig contract remuneration does not apply to such payments, and PIT is withheld at the standard rate of 18%.

Therefore, merely including a particular payment in the gig contract, or formally defining it as part of remuneration, may not be sufficient to qualify for the Diia City preferential tax treatment. Each type of payment must be analysed separately — considering its economic and legal nature, the provisions of the Tax Code of Ukraine, the Diia City Law, and the current STS position.

Sick pay also does not form part of gig remuneration and is therefore not covered by the Diia City preferential tax regime. Accordingly, PIT at 18% applies to sick pay.

The misclassification of payments is one of the most significant risks in remuneration administration for Diia City residents.

A gig contract is not an employment contract

Another practical consideration is the HR administration of gig specialists.

A gig contract creates a special model of engagement provided for under Diia City legislation. However, all HR processes applicable to full-time employees cannot be mechanically applied to gig specialists. The legal basis for payments, the rules for recording absences, social guarantees, and certain aspects of taxation and documentation differ significantly.

The payroll administration team must therefore understand not only the mechanics of salary calculation, but also the legal nature of each type of payment. For example, a bonus, sick pay, a termination payment upon expiry of a gig contract, or company-paid insurance may each have a different legal and tax character. A single tax rate cannot therefore be applied uniformly to all payments. The task of the payroll team is not only to calculate the correct amount, but also to correctly determine what is being paid and under what rules that payment should be taxed.

Before transitioning to Diia City, a comprehensive review of the payroll system and associated tax risks is essential 

Companies often begin their Diia City analysis with the question: “How much will we save on taxes?”

But a better, broader question is: “How will the payroll process and the company’s overall personnel costs change after transitioning to Diia City?”

Before making the transition, it is worth modelling several scenarios: using employment contracts, gig contracts, or a combination of both; calculating the full cost of each model for the company; analysing the structure of remuneration and additional staff benefits; determining the tax treatment of each type of payment; assessing the readiness of the accounting system; and introducing the necessary control procedures.

In practice, the greatest risks arise not in calculating the remuneration amount itself, but at the stage of determining the legal nature of the payment and its applicable tax treatment. The most common errors include:

Incorrectly reporting different types of income in tax and other statutory filings.

• Applying the 5% PIT rate to all gig specialist payments without analysing their legal nature;
• Determining the tax rate based solely on the name of a payment, without verifying its substance and the basis for accrual;
• Failing to review the terms of the gig contract and any supplementary agreements;
• Automatically applying to gig specialists the rules applicable to full-time employees;
• Incorrectly determining the tax treatment of sick pay and other payments that do not form part of gig remuneration;
• Incorrectly defining the composition of gig remuneration;
• Insufficient documentary evidence of the grounds for accruing individual payments;
• Failing to monitor changes to gig contract terms and their effect on the accrual and taxation of payments;
• Incorrectly reporting different types of income in tax and other statutory filings.

Diia City is an opportunity, but it requires the right infrastructure 

For IT companies, Diia City can deliver significant advantages: competitive tax rates, flexible models for engaging specialists, and a clearer framework for running a technology business in Ukraine.

But a special tax regime does not mean simplified payroll. On the contrary — the combination of different engagement models, special rates, varied payment types, and residency requirements makes high-quality payroll administration and compliance more important than ever.

Diia City should therefore be viewed not simply as an opportunity to obtain tax benefits, but as a comprehensive model for running an IT business — one in which taxation, payroll, HR administration, and regulatory compliance must function as a single, integrated system. A mistake in any one element can affect the accuracy of the entire process.