Diia.City: Registration Algorithm and Requirements for Companies

What Is Diia.City?

Ukraine is home to a large number of qualified specialists and ambitious entrepreneurs who want to create their own startup or take an existing one to the next level. Unfortunately, however, development is significantly hindered by an outdated taxation system, poorly adapted legal norms, and the absence of mechanisms to encourage and support businesses in their early stages. The fact that such mechanisms already exist in other countries is what leads entrepreneurs to register companies abroad and specialists to seek clients outside Ukraine. The set of measures known as Diia.City is being introduced with the aim of correcting this situation and accelerating the development of the IT industry.

Why Does Diia.City Matter?

The goal of Diia City is to create sufficiently favorable conditions in Ukraine to give existing and new companies the space, opportunity, and additional guarantees for the development of IT business. A strong legislative framework, favorable taxation, and the ability to openly receive income will significantly increase Ukraine’s attractiveness in the eyes of domestic and foreign investors.

Once the primary goals of Diia.City are achieved, it will be in the state’s interest to continue introducing legislative changes in line with current global trends. This is driven by the dynamic nature and heightened sensitivity of the IT industry to restrictions and regulatory mechanisms on the part of the state. For example, Diia.City introduces a mechanism — new to Ukrainian legislation — for companies to interact with remote workers and outsourcing specialists. While from a practical standpoint such contracts are not new, their legislative formalization creates additional legal guarantees for both parties.

What Benefit Does This Have for My Company?

If your company is a startup, an outsourcing company, an R&D company, or a company that produces products or provides services in the IT field, the following is available to you:

• A special tax regime aimed at reducing the financial burden on IT businesses and providing tax incentives for investors.
• An expanded list of options for formalizing employment relationships. The state provides the ability to choose the most advantageous option for both the worker and the company. In addition to the already mentioned gig contract, the classic employment agreement under the Labor Code and contractual relationships with sole proprietors (FOPs) remain available.
• Guarantees for the protection of your IP (intellectual property). The primary asset of any IT company is its intellectual property, which makes IP protection guarantees of key importance.
• Clarity on IP matters relating to works for hire. A work for hire is a work created as a result of an employment relationship or the provision of a service. Detailed and clear regulation of the legal nature of works for hire is a guarantee of productive interaction and the prevention of disputes with employees or outsourcing specialists.
• Introduction of venture investment mechanisms. Venture investments cover a wide range of instruments and are typically associated with innovative companies and startups. Quite often, the transformation of a revolutionary idea or a small startup into a successful company is made possible by such investments.
• Protection against unlawful interference by law enforcement. In addition to typical risks, an additional obstacle for entrepreneurs is the fairly high likelihood of unlawful interference by law enforcement representatives. The changes included in Diia City cover not only criminal prosecution of such cases but also stricter sanctions.

So How Do I Obtain Diia.City Resident Status?

To obtain Diia.City resident status, four criteria must be met:

What Activities Fall within the IT Field?

The legislator specifies that the following types of activities are classified as IT:

• computer programming
• IT consulting
• computer equipment management
• computer game publishing
• software publishing
• provision of software products (games) in online mode
• provision of web services for the delivery of software applications
• educational activities in the field of information technologies
• data processing (e.g., automated processing of client data, website management)
• research and experimental development in the field of information and information-communication technologies
• conducting marketing campaigns and providing advertising services using software developed with the participation of a Diia.City resident, on the Internet and/or on user devices
• activities related to the circulation of virtual assets
• cybersecurity (e.g., development of specialized software and hardware-software products, or detection of cyberattacks and remediation of their consequences)
• activities involving robotics systems
• additionally defined by the Cabinet of Ministers of Ukraine.

And What Are the Requirements for Diia.City Residents?

In addition to the type of activity, the key requirement is that the company be registered in Ukraine. Compliance with the other requirements is verified within a defined period after resident status is obtained. For this reason, company management must accurately assess the company and its pace of development. In appropriate circumstances, it is possible to obtain temporary resident status, which grants all the benefits of resident status along with a period of time to remedy any non-compliance.

The requirements are as follows:

The average monthly remuneration of employees and gig specialists must be at least the equivalent of €1,200.

The total number of employees and gig specialists must equal or exceed 20 persons.

90% of the company’s income must come from the types of activities provided for by Diia City.

If the company fails to meet these requirements, it may be stripped of its resident status.

Under What Circumstances Will My Company Be Unable to Become a Resident?

In most cases, the circumstances that preclude obtaining resident status relate to profitability, the formation of share capital, legal violations, or the place of registration or activity of the company.

• The company is registered in a foreign state.
• 25 percent of the share capital belongs to the state or a territorial community.
• The company has the status of a non-profit enterprise.
• In the course of its activities, the company has violated legislation on the disclosure of information about ultimate beneficial owners and/or the submission of information about the ownership structure of a legal entity. The legislator provides an exhaustive list of such circumstances:
• A share of the share capital belongs to a state recognized by the Verkhovna Rada of Ukraine as an aggressor, as well as to legal entities registered in such a state and individuals permanently residing in such a state.
• 25 percent belongs to legal entities from countries included on the list of countries that do not cooperate in the area of combating money laundering.
• Sanctions have been applied to the company pursuant to Ukrainian legislation or sanctions recognized by Ukraine, including where the company has a connection to a person against whom such sanctions have been applied.
• The company has been officially declared bankrupt or is in the process of liquidation.
• The company has a tax debt exceeding 10 minimum wages.
• The company carries out activities involving the circulation of virtual assets without being entered in the relevant register.
• The company is engaged, among other things, in the organization or conduct of gambling.

What Is Meant by Temporary Diia.City Resident Status?

A distinctive feature of the resident requirements is that a certain portion of them are verified only after resident status has been obtained. However, if management recognizes that the company will not meet them within the specified timeframe, the company may, with the agreement of the authorized body, be granted a period to remedy the deficiencies (temporary resident status).

A temporary resident receives all the benefits of permanent status along with a period of time to bring the company into compliance. If the company is fully compliant with the requirements by the end of the established period, it will automatically receive permanent resident status.

To be eligible for temporary Diia City resident status, certain criteria must be met and the consent of the authorized body must be obtained.

The criteria are:

• Carrying out the activities established by Diia.City.
• 90% of income comes from the specified activities.
• The company was registered at least 2 years prior to the moment of application.
• No circumstances exist that preclude obtaining resident status.
• Income within the limits defined for Group 3 under the simplified taxation system.

In this way, the state significantly broadens the range of companies that can become residents — primarily as a means of supporting startups. Depending on when the application is submitted, the period for bringing the company into compliance can be nearly 2 years. For an already established IT company, this period should be sufficient to reach the required indicators.

So What Should I Do If I Am Ready to Apply for Diia.City Resident Status?

An application form for resident status is available on the relevant government platform. You must complete it and provide information about the company, its officers, types of activity, and income, confirm compliance with the requirements and the absence of negative circumstances, and — in the event of partial non-compliance — provide information about a prior application for temporary status.

A certified power of attorney authorizing the person submitting the application to act on behalf of the company must be attached to the application itself. The special tax regime available to Diia.City residents is possible only upon the company’s own decision and requires a separate additional application. Once the document package has been assembled, it must be certified with a digital signature.

The documents are submitted to the Ministry of Digital Transformation of Ukraine. For this purpose, the relevant online platforms and email addresses will be created and listed on the official portals of Diia.City and the Ministry of Digital Transformation of Ukraine.

And How Will I Know That Everything Went Well and the Company Has Obtained Resident Status?

Once all the necessary documents are with the Ministry of Digital Transformation of Ukraine, the information stated in the application is verified within 10 days. Based on the results of the verification, a decision is made to grant resident status. If no response is received within 10 days, the status is granted automatically.

Conclusions

Diia City is unquestionably a step forward for the Ukrainian IT sector. However, it is only the beginning of the journey toward creating favorable and attractive conditions for doing business. At this stage, investors are attracted by the relatively low cost of services combined with the high qualifications of Ukrainian specialists and startups. However, significant risks are present in the form of instability on the part of the state and the absence of legislative consolidation of positive global practices in the IT business field. An additional unfavorable factor is the very possibility of unlawful interference by law enforcement in business. Such risks negate all the positive aspects for investors. Combating and eliminating these obstacles is a difficult and lengthy process, yet a necessary one given the intensifying competition between countries for the attention of IT business.

In the context of globalization, the internet, and the free movement of capital, IT business has a positive effect on the economies of countries. However, the specific nature of this business allows it to “migrate” between countries in search of more favorable conditions. Such changes are legal in nature and will have no effect on the product, employees, online resources, or services.

Diia.City increases the country’s attractiveness for foreign investment and aims to create conditions not only for Ukrainian businesses but also for the “migration” of foreign companies.