Fundamentals of Legal Regulation in the Sector

Over the past three years, Ukraine’s tech sector has become a symbol of economic resilience and innovation. Despite the war, it remains a driver of growth, aided by a special legal and tax regime for IT – Diia.City – introduced in early 2022. Diia.City is now the cornerstone of IT industry regulation, offering exclusive tax and regulatory conditions to keep the sector thriving during war. This stability has built considerable trust among businesses and investors. In just three years, over 2,000 tech companies have obtained residency in Diia.City, drawn by the promise of a Silicon Valley-style business environment combined with the cost advantages of Eastern Europe.

Even compared to other European tech hubs, Diia.City stands out. For instance, Poland offers a stable EU business climate and certain tax breaks, but it has no dedicated IT zone – overall taxes and labour costs there are higher. Estonia is renowned for digital governance and a 0% corporate tax on reinvested profits, but it still levies about 20% on distributed profits and personal income, and its talent pool is much smaller. By contrast, Diia.City offers an ultra-competitive 5% personal income tax and a 9% exit capital tax, along with a convenient legal framework (permitting non-compete agreements, stock options, gig contracts, etc.), despite the geopolitical risks of operating in a war zone. It is worth noting that at the end of 2024, the military levy was increased from 1.5% to 5% for the duration of martial law. This adjustment has led to a notable rise in the overall tax burden on IT personnel. Nevertheless, the resulting effective tax rate remains significantly lower than those applicable in most other European jurisdictions. Many Ukrainian and European tech firms now use a hybrid structure: an EU-based entity for stability and a Diia.City presence in Ukraine for talent access and tax savings. Each jurisdiction has its merits, but Diia.City was explicitly designed to make Ukraine attractive in this landscape – and it is largely succeeding.

Key Provisions

Diia.City’s tax framework offers IT businesses some of the most favourable conditions in Europe. Companies in Diia.City can opt to pay 9% exit capital tax (instead of the standard 18% corporate income tax), deferring any tax until profits are paid out as dividends. On the personal side, tech specialists at a Diia.City company pay just 5% income tax on their compensation, plus the 5% military levy. Meanwhile, the employer’s social security contribution is capped at 22% of one minimum wage per month per employee (rather than 22% of total salary). In effect, a Diia.City firm’s overall tax burden – for both the company and its workers – is dramatically lower than that of a typical Ukrainian or EU IT firm, enabling more funds to be reinvested into growth.

Beyond taxes, Diia.City introduced modern legal instruments into Ukrainian practice. It explicitly allows non-compete agreements, employee stock options, convertible notes, and flexible gig contracts (civil law contracts for IT specialists with basic social benefits). Such tools, common in global tech hubs, previously lacked clear legal status in Ukraine. By legitimising them, Diia.City makes it easier for local companies to attract talent and investment on terms familiar to venture capital and international partners. This flexibility in structuring operations – whether via regular employment or contract-based work – gives companies agility in managing their teams, something that was hard to achieve under the old legal framework.

Legal Protection Offered by the Regulatory Framework

Another crucial protection in wartime is the ability to secure mobilisation deferrals for key employees. Ukrainian legislation allows companies deemed critically important for the economy to “book” (exempt) a portion of their staff from conscription. In practice, qualifying firms can have up to 50% of eligible employees shielded from mobilisation. Diia.City residency significantly helps IT companies qualify for this status – being in the regime checks one of the necessary criteria. Dozens of Diia.City companies have already used this mechanism to keep essential developers and engineers in their roles. In short, Diia.City membership tangibly helps IT businesses protect their talent from mobilisation – a benefit not available to all ordinary companies.

Recent and Planned Legal Developments

At the end of 2024, the Ukrainian Parliament adopted Law of Ukraine № 4113-IX On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine to Stimulate the Development of the Digital Economy in Ukraine, which amended tax legislation to enhance Diia.City. Effective as of 1 January 2025, this law broadened the regime’s accessibility and addressed technical issues. Notably, it expanded start-up eligibility: companies with fewer than 9 employees can still qualify for Diia.City’s 5% personal tax rate, whereas previously such small firms did not possess such a right. The law also exempts Diia.City residents from the 9% exit capital tax when the profits are donated to the Armed Forces of Ukraine, creating a tax incentive for tech firms to support defence efforts. In addition, it abolished the requirement to issue statements of provided services for gig workers, simplifying operational paperwork. Finally, various minor inconsistencies in the original Diia.City laws were corrected. These amendments modernise and reinforce Diia.City, underscoring the government’s commitment to keep the digital economy framework attractive and up-to-date.

Looking ahead, the broader tax environment is evolving in a way that makes Diia.City even more appealing. For many years, a lot of Ukrainian IT companies engaged developers as individual entrepreneurs under a 5% simplified tax regime outside of Diia.City. The Ukrainian government plans to impose significantly higher tax rates on income earned by private entrepreneurs outside the Diia.City regime up till 2030. This effectively closes the loophole that allowed non-resident IT firms to enjoy Diia.City-like tax benefits. As a result, more IT specialists and companies are migrating into Diia.City to retain a low-tax setup. The government clearly intends Diia.City to be the main platform for growth in the tech industry, ensuring participants pay taxes transparently while benefiting from incentives.

Three years after its launch, Diia.City has solidified its status as the flagship programme of Ukraine’s digital economy. The regime is actively managed by the Ministry of Digital Transformation, which monitors compliance but has been pragmatic during the war to accommodate difficulties. Officials consistently reaffirm that Diia.City’s generous terms will remain in place for 25 years (until 2046), honouring the legislative guarantee. Even amid pressures on the state budget and taking into consideration the increase in the military levy for all businesses due to war, the government has kept this regime almost intact—a strong signal of policy stability that allows companies to plan ahead with confidence.

The impact of Diia.City is evident in its widespread adoption. Over 2,000 companies have already become Diia.City residents, including almost all Ukrainian IT service exporters and home-grown tech product companies. This broad uptake shows that the industry sees real value in the regime. Firms that once relied on a scheme with numerous private entrepreneurs have reorganised under Diia.City’s framework, gaining legal clarity and tax efficiency while still retaining flexibility through gig contracts. During the war, Diia.City companies not only saved money via tax relief but also benefited from the regime’s special wartime privileges (like easier access to mobilisation deferrals for staff). These advantages enabled many firms to continue delivering projects to international clients with minimal disruption, even amid power outages and security threats. The IT sector’s strong export performance in 2022–2024, despite the war, underscores how pivotal Diia.City has been to the industry’s resilience. By way of summary, Diia.City has transitioned from an ambitious idea into an everyday reality for Ukraine’s tech business – a testament to how a well-crafted legal framework can drive growth and sustain an industry even in adverse conditions.

AI Regulation

Beyond Diia.City, Ukraine is gradually developing regulations for emerging technologies, with artificial intelligence (AI) being a prime example. At present, there is no specific AI law in Ukraine – AI-related issues are handled under general legislation, and authorities have adopted a cautious approach that prioritises innovation. In 2020, the government approved a National AI Development Concept up to 2030, outlining goals to foster AI research and integration and to eventually craft legal and ethical standards. In late 2023, the Ministry of Digital Transformation of Ukraine published a roadmap for AI regulation, advocating a “bottom-up” approach: starting with industry-led standards, voluntary ethics guidelines, and sandbox trials rather than rushing to impose strict rules.

In mid-2024, a White Paper on AI regulation was released by the Ministry of Digital Transformation of Ukraine as a blueprint for future lawmaking. It suggests that Ukraine will align its approach with the Regulation of the European Parliament and of the Council No. 2024/1689 of 13 June 2024 (EU AI Act) as part of Ukraine’s broader aim of EU integration in two stages. This document proposes adopting the EU AI Act’s “Trusted Flagger” concept, which essentially involves leading public organisations acting as trusted observers that filter complaints about AI-related violations on various platforms. Upon receipt, such an observer reviews the complaint for a possible violation and, if it concludes that a violation has occurred, forwards the complaint directly to the platform. As part of the first stage, expected to last 2–3 years, the plan includes establishing a regulatory sandbox, developing a methodology for assessing the impact of artificial intelligence on human rights, and encouraging the business community to adopt voluntary codes of conduct for AI. This approach aims to encourage a culture of self-regulation, rather than imposing strict regulations. The IT community responded positively to the government’s initiative, as reflected in the adoption of a Voluntary Code of Conduct on the Ethical and Responsible Use of Artificial Intelligence by several major product-based technology companies at the end of 2024. This code sets out eight key principles for the ethical and responsible use, development, and governance of AI systems. At the second stage, the government plans to introduce binding regulation by implementing the EU AI Act. Overall, this reflects a notably flexible and balanced approach aimed at creating the most favourable conditions possible for the development of AI companies in Ukraine.

In the meantime, AI development in Ukraine faces few restrictions and is actively encouraged. There are currently no bans on AI projects; on the contrary, the government is supportive of AI initiatives and encourages businesses to adopt responsible AI practices voluntarily. For foreign clients and investors, the key takeaway is that Ukraine is embracing AI innovation in an open environment while moving toward EU-aligned governance. Companies operating in Ukraine’s AI space can innovate freely now, and they can be confident that future regulations will likely mirror those in the EU, minimising any surprises.

Ukraine’s strategy of implementing supportive legal frameworks has proven vital in sustaining its tech industry through wartime challenges. Initiatives like Diia.City have kept the sector resilient and competitive, while a forward-looking approach to emerging technologies such as AI ensures innovation continues unhindered. By maintaining these investor-friendly policies and aligning with international standards, Ukraine’s digital economy is poised for stable growth and deeper integration with global markets in the years ahead.