On July 15, 2021 the Verkhovna Rada of Ukraine adopted the Law “On Stimulating the Development of the Digital Economy in Ukraine” (on the implementation of the Diya City). Among other things, according to the legislator, the stimulation of the digital economy will occur through the introduction of a new type of contractual relationship between the employee-gig-contract for companies that are residents of the Diya City.
Today, the IT industry operates under two types of contractual relationships – employment contracts and civil law contracts with FOPs. So, the companies choose either to pay significantly higher taxes and conclude employment contracts or risk getting fined more than UAH 100,000 by the State Labour Inspectorate for every concealed case of employment and transfer their employees to FOP (according to statistics, there are over 200 thousand of them in Ukraine, and the annual growth is about +30 thousand).
Under what conditions can a gig-contract be signed?
- Gig-contracts are not registered. But in order for a company to have the right to enter into such contracts with employees, it must become a resident of the Diya.
- In the period after the conclusion of the contract and before the start of the specialist’s work, the company must report the conclusion of the contract to the tax authority.
- In turn, all insurance information of the specialist under the contract is immediately entered into a personal account on the website of the Pension Fund of Ukraine.
Content of the gig-contract
According to the general rule of “freedom of contract”, the parties are free to form the content of the gig-contract, in particular the functions of the gig-specialist, the amount of remuneration (fixed for a certain calendar period or depending on the volume of tasks performed), the possibility to determine the currency of remuneration, methods of establishing and coordinating tasks, information exchange and other.
In addition, if the parties in the gig-contract do not establish other conditions, by default, the non-property intellectual property rights for the work of the specialist belong to the company.
Also, the specialist receives social guarantees provided by the labor law: the right to rest at least 17 working days per year, sick pay, as well as a break in work due to pregnancy and childbirth.
However, such a contract must be concluded for a clearly defined term (the parties may agree on its automatic extension), and it must also be specified that during the first 3 months of the contract any party has the right to unilaterally terminate it by informing the other party not later than 3 calendar days before the date of termination. If such party is a resident of Diya City, he has the right to terminate the contract without waiting 30 days, but in this case, he must pay monetary compensation to the specialist.
If one of the parties wishes to terminate the contract after 3 months, the contract can be terminated with at least 30 days’ notice to the other party.
And it is important: in order for a civil law contract between a City Action resident and a specialist to be considered a gig-contract, it must explicitly say so.
What about foreign specialists?
As for foreign gig-specialists, the legislator also simplified the procedure for legalizing a foreigner’s stay in Ukraine to a minimum. If previously a foreign worker had to obtain a work permit, and then to obtain a temporary residence permit, the legalization of a specialist’s stay in Ukraine is based on applying to the migration service for a temporary residence permit, and the work permit is obtained only at the request of the company itself.
Tax rates and reporting
The tax burden of the specialist consists of the personal income tax (PIT) rate of 5%, the unified social contribution (UST) at the rate of 22% of the minimum wage and the military levy at the rate of 1.5%.
Full administration of the tax burden (payment of taxes and filing of reports) is carried out by the company resident of Diya City.
The use of gig-contracts by residents will allow them to reduce the tax burden, avoid penalties from the State Labour Inspectorate for concealing employment relationships, whiten the model of building contractual relationships with employees, which as a result will increase the market capitalization of the company.
Patriot.Legal provides legal and auditing support for obtaining residency for Diya City, preparing reports and conducting independent audits.
Svyatoslav Lindyuk, an attorney with Patriot.Legal’s Litigation Representation and Corporate Law practice