Taxation in IT sphere

Taxation of information services in Ukraine?

The Cabinet of Ministers, together with the fiscal services, is constantly trying to create conditions in order to attract additional funds to the country’s budget. Since the information sphere is developing at a great pace every year, it is logical that officials wanted to get this pie under control, or as they say: “Proper administration”. But this market segment is extensive and the state simply does not have enough strength and resources to cover it completely. First, they took under the guardianship of news agencies with digital publications and the Ministry of Justice is now successfully issuing registration certificates to such organizations with the right to broadcast on the territory of Ukraine. As a rule, such companies choose the general taxation system. Secondly, they are trying to control online stores. Now, in order to sell goods, services online, you need to at least open an individual entrepreneur and keep records of the products sold and report once a quarter through the taxpayer’s electronic account. Naturally, it is necessary to pay a single social contribution, regardless of whether there was a profit or not. But an online store is a separate topic, today we will only talk about virtual products, and specifically, about software development services and VAT for them.

Skeptics will say that it is not worth paying taxes in the IT industry, every second programmer does so. People just sit at home, prepare software and sell it to corporations or other individuals. But earnings in such cases are minimum, maximum average. The fact is that a self-respecting company with a million or billions in turnover must make a purchase through tax reporting in order to write off costs and is ready to pay two or even three dear for the purchased software.

Is VAT subject to software development?

In the Tax Code of Ukraine, not much is written about the IT sphere, but it is quite informative. We will not go into boring details, as rates and conditions may change tomorrow. But everything that interests you can be found in the code through the standard Google Chrome search by pressing the combination of the Ctrl and F. buttons. If software developers can work on a common or simplified taxation system. To do this, you need to register a legal entity, individual entrepreneur, private enterprise or LLC. It all depends on the expected turnover of funds per year. For example, if you create and sell software for no more than 7.000.000 UAH per year, then you just need to register an individual entrepreneur in the third group. In this case, a person pays 5 percent of the turnover and a single social contribution in the amount of 22 percent of the minimum wage to the country’s budget.

Software development with the need for VAT registration:

1. If the company imports ready-made software (the fact of crossing the border, real or virtual, is important);
2. It Is engaged in the supply of services in terms of informatization (for example, technical support for complex systems of closed or open access);
3. The company supplies goods or services for the creation of software, the owner of which will become the customer after the closing of the transaction;
4. The company supplies software equipment which is part of the functioning system.

Let’s look at these points with an example. If the company is engaged in the creation of programs for various types of equipment (general use or specialized), imports a product from all over the world, makes software (partially or on a turnkey basis) to order according to a previously prepared technical assignment, and also sells “Hardware”, components for it with mandatory software support. In these cases, the business must become a value added taxpayer at the rate of 20 percent of the profit received.

Naturally, an experienced lawyer and accountant is able to find loopholes in the country’s legislation and bypass government fees. But, if you plan to create a working and profitable IT business, it is advisable to execute transactions both in the domestic and foreign markets following the letter of tax legislation. It will be easier to attract foreign investment to such a business and sell it to a new owner at a profit.

Remember! Investors are reluctant to invest a lot of money in the gray or black economy. Because companies, even IT spheres, working according to incomprehensible schemes will fall into the field of financial monitoring and may even run into personal sanctions, both in Ukraine and international.

Is there a preferential taxation for IT companies?

The IT industry is developing and gaining momentum not only in Ukraine, but also in the world. Since there are more and more subjects of financial and economic activity in this area, the government of our country has decided to stimulate the growth of investments in the IT market by providing various types of benefits, preferences for start-up companies and freed some types of operations from the need to pay mandatory payments. Also, newly registered firms have the opportunity to choose a certain taxation system for themselves. But at the same time, some benefits for IT organizations were canceled. From January 1, programmers will be deprived of the right to pay income tax at a reduced rate of 5 percent and are now required to apply the standard rate of 18 percent to their business.

It is also worth paying attention to the sale of royalties, which can be an integral part of the software. For example, Microsoft sells a product called Windows with a mandatory annual verification key renewal. In such cases, funds are credited to the bank account twice a year. Therefore, Bill Gates should and can generate a profit statement in two ways:

• The first time this year the deal is closed after the sale of Windows and the second time, after the renewal of the security key (Here the declaration is submitted 2 times indicating two different transactions with one legal entity or individual);
• For the entire financial year, payment from one entity is received 2 times, as in the first case, but reporting is generated and sent to the fiscal service once, at the end of the year. (Here 2 customer relationships are displayed 1 time as a deal stretched out in time).

Important! If your income from the sale of software is less than one million UAH per year, then you do not need to register as a VAT payer.

Until January 1, 2023, there is a privilege according to which all business entities that supply software products are exempt from VAT, but with some reservations. For example, if software or software support is derived from these products, then this is automatically considered informatization services, and here benefits and preferences do not apply. The solution may be to formalize such transactions as “Services for support, revision of existing software”. Here it is better to talk to an accountant, ask an outside economist and make your own decision based on the information received and, which is important from the situation in the company’s economy.

Selling software in Ukraine without VAT?

As mentioned above, in our country there is an opportunity to sell software without paying value added tax, regardless of how the product is transferred. Can be sold in tangible or non-tangible media, for example, via the Internet via downloads or via email. It is allowed to sell in several stages and all of them will be exempt from VAT. But it is worth paying attention to the following point. The delivery of the software product itself is exempted from VAT. If, after making a profit from such an operation, the company transfers part of the money to the author in the form of royalties for the use of intellectual property, then the developer company is obliged to transfer all taxes to the budget. This is the answer to the question: “Is software subject to VAT”?

Important to remember! Although the IT sphere is virtual, it is also an integral part of the real economy and is subject to absolutely all laws, decrees, regulations and international agreements.

Import of software with and without VAT?

Since the IT industry is more focused on the international market, then often goods, services on this topic are produced for export by more developed countries, in particular the United States of America (Silicon Valley, California). Accordingly, less developed countries are forced to buy (import) software both for the needs of private individuals and for the functioning of large production (factories, factories) and the public sector.

You can buy software abroad only in two cases:

1. You personally go to the country you are interested in and buy the necessary software in a specialized store there and take it to Ukraine in your hand luggage or order it through the online store. (If the purchase price does not exceed the permissible level of the minimum amount, which is subject to VAT, other import duties);
2. You order a computer program from foreigners for personal (home) use.

If a legal entity buys software abroad and imports it to Ukraine to function in its economic activities, then value added tax is paid according to the standard scheme.

This article is posted for general informational purposes only and should not be considered as official legal advice!