Beyond the government’s standard response to a military invasion – a shift to martial law mode of operation, Ukraine has made its IT industry one of the key instruments in keeping the country afloat. Since February 24, IT has succeeded and continues to be extraordinarily successful in saving lives and defending the motherland. People can rely on apps to quickly notify them of air raids, satellite internet access provides military and emergency communication. The one-stop government platform collects donations, offers state-issued offsets, and provides other government services online. OSINT helps to investigate war crimes and effectively detect criminals. Nowadays, a functioning computer industry is proving to be an essential pillar for a country at war in an increasingly digital world.

Over the past few years, the IT industry in Ukraine has grown at a steady pace as part of the country’s economic development. Shortly before the war in response to the pandemic, the government created Diia.City – an optional legal and fiscal regime intended to facilitate and develop the IT industry. Since the beginning of the war, this foresight has enabled the country to build on it and to persevere in spectacular fashion. It is worth exploring the Ukrainian experience on keeping the IT industry running that saves lives.

Default security mechanisms

To begin with, Ukraine has put in place benefit and protection mechanisms that apply by default to local companies, regardless of the sector of activity and the applicable special regimes:

• Exemption projects. Ukrainian legal entities can apply for draft exemptions in order to avoid business interruptions that may be beneficial to Ukraine. Draft exemptions must be approved by local authorities and relevant executive bodies of Ukraine, including the Ministry of Defense. Exemptions apply only to employees of Ukrainian legal entities.
• Internal relocation within the company. It is important to ensure that companies can quickly relocate their physical assets to safer parts of the country with government assistance. If the government is willing to help with resettlement, resettling in the country may seem much more beneficial than leaving the country immediately. Regional IT clusters and local communities generally support any initiatives that can help businesses, including helping with relocation and approving the exemption list projects mentioned above.
• Document management. During the invasion, keeping hard copies can be very cumbersome. Electronic document management with non-invasive requirements should be introduced, followed by the ability to destroy all hard copies in worst-case scenarios with minimized negative consequences. For example, if the data on the accumulated salary has been lost due to the war, this period will be excluded from the calculation of the average salary to avoid an unreasonable reduction of it.
• Labor relations. The wartime conditions required an adaptation of Ukrainian labor legislation. During martial law, a company can unilaterally suspend the execution of an employment contract, announce downtimes or modify important working conditions. This makes it possible to react appropriately if performance is temporarily disrupted due to the war (for example, announcing a time-out instead of a dismissal).

In summary, an emergency framework must be responsive to current and potential threats, i.e. it must have the foresight to adapt to any black Swan Event. The regulations in force in Ukraine have proven to be adequate and have allowed Ukrainian companies to continue operating without the need to transfer their operations abroad.

Diet of Diia.City

Diia.City is an optional legal and tax regime created by the government for the IT industry during the pandemic with the aim of facilitating the investment and establishment of such companies in Ukraine. It provides a long list of benefits, including the following:

• Gig-specialists. Diia.City allows residents to involve specialists under a special scheme – an employment contract that combines elements of an employment contract and a civil contract. This means that gig specialists are asked to take on specific projects rather than becoming a permanent staff member. Nevertheless, this guarantees basic social rights for specialists, the possibility of agreeing on comfortable working conditions for both parties, as well as transparency and low taxes due from residents. The gig specialist is not required to obtain contractor status, which means that such a form of involvement is less burdensome. Residents of Diia.City can, however, opt for traditional forms of employment such as standard employment contracts or private contractors.
• Fiscal advantages. Diia.City guarantees its residents reduced tax rates. Thus, labor taxes include 5% personal income tax, 22% of the minimum wage as social security contributions and 1.5% military tax. Corporation tax provides only 9% exit tax on capital or 18% income tax. Similarly, the Diia.City regime provides for the facilitation of investments such as 0% on an individual’s dividends under certain conditions and tax allowances.
• Non-Compete Agreement. Labor specialists can sign a written non-competition agreement and be obligated not to engage in competing activities with the former employer for 12 months after termination of employment. Ukrainian legislation provides for a fairly wide range of such activities, ranging from the conclusion of contracts with similar companies to the direct or indirect holding of shares in other competing companies.
• Accessibility of services. Recently, Diia.City has faced positive changes such as waiving audit reports for a fixed period and extending potential residents (those who provide card payment system solutions or technology products for fields of defense and industry). During martial law, Diia.City residents and potential applicants will retain their resident status even if they do not meet several residency criteria, such as number of employees or average salary.

More details about Diia.City (e.g. comparison with similar regimes in other jurisdictions, intellectual property safeguards, etc.) can be found here.

Proof of concept

Recent Diia.City residence statistics prove that doing IT business through a Ukrainian company is a viable option. Since the introduction of martial law in Ukraine on February 24, 2022, the operation of most state registers has been suspended – with one notable exception: Diia.City. Nearly 150 international and Ukrainian companies joined this legal and fiscal space between March and April 2022.

New residents include AgriChain (agribusiness software designer), Archivizer (service developer for 3D visualizations), Axdraft (contract lifecycle management platform), Bru.Digital (team of graphic designers , material specialists, designers), ISSP (service provider of cybersecurity and data management solutions), Luxoft (provider of enterprise technology services), MEGOGO (multimedia service for video and TV streaming), Netcracker (provider from BSS, OSS, SDN/NFV), PandaDoc (business software), Preply (online educational service platform), Snap Inc. (social media) and others.

These spectacular results have been achieved thanks to the collective efforts of the private and public sectors to develop an appropriate legal framework, as well as the promoters willing to continue operating under the Ukrainian flag. The suffering of Mariupol, Bucha, Irpin, Kherson, countless other cities expects no less from all concerned. Ukrainians are determined to forge a sustainable economy worthy of the efforts of the countless volunteers who save lives on the battlefields and in hospitals.

Diia.City was introduced during the pandemic and works well during the war. It embodies the creativity and resilience of Ukrainians. Thank you for maintaining cooperation with Ukrainian developers, and if you haven’t established one yet, today seems like a perfect day to start.