Articles | April 29, 2021
The IT industry in Poland and Ukraine – legal regulations, state support, development directions – part 1.
Poland and Ukraine have become increasingly important to companies which are interested in software development in 2021. According to data from reports on the CEE region, these countries offer the greatest number of programmers on the market, and IT companies generate the highest revenues among all countries in the region. What are the IT regulations in these countries? What forms of state support may tech companies benefit from?
Regulations for the IT industry in Ukraine
Currently, there are no separate regulations for the software development sector in Ukraine. This is in line with global practice. The lack of separate regulatory rules for the industry has a positive effect on its development and competitiveness on the market. IT companies operate within Ukraine’s general legal system: they apply the requirements specified in the relevant regulations (tax, customs, currency, etc.) to separate business processes. Human capital is one of the main factors in the development of the software development industry. As such, progress depends on the availability of qualified specialists and their terms of cooperation.
The decisive factors for the IT industry in Ukraine are:
- taxes on developers’ remuneration;
- legal residency and employment of foreigners;
- the number of university graduates and the quality of their technical skills.
Software development in Ukraine
According to the newest reports, in 2021 the IT services market in Ukraine grew by 20%. 23,000 students graduate from technical universities each year and today there are 200,000 IT specialists on the market. Ukraine ranks 44th in the EF English Proficiency Index, which evaluates English language skills. Depending on the sources, there are currently 3000 to 5000 IT companies operating in Ukraine, and renowned brands such as Samsung, Google and Siemens invest here. According to the SkillValue 2020 Report, which assesses the competences of programmers, Ukraine is ranked 4th in Europe.
Remuneration in the IT industry in Ukraine
In the table below you can see the taxes levied on the 3rd group. Such entrepreneurs pay a unified tax to the local budget and a unified social security tax (to the account of the State Fiscal Service of Ukraine).
|Unified tax||5% of income|
|Unified tax – compulsory state social insurance||22% of the minimum monthly salary (USD 47,46 / month – in Q1 2021 this amounted to approximately 1,320 UAH and PLN 184.80)|
An alternative model is hiring regular employees, for which the applicable tax rates are as follows:
|Income tax||18% of remuneration|
|Military tax||1.5% of remuneration|
|Unified tax – compulsory state social insurance||22% on part of remuneration not exceeding the equivalent to 15 minimum monthly salaries, minimum USD 47,46 (1,320 UAH and PLN 184.80), maximum USD 711,84 (19,800 UAH and PLN 2,772.00)|
It should be noted that the income tax and military service exemption tax are deducted from the employee’s remuneration, and while the unified tax for compulsory state social insurance is added to remuneration and paid by the employer. The single application system for social insurance has been operating in Ukraine since 2011 (previously there were four separate funds). On this occasion, it is worth mentioning that programmers from Ukraine often find it surprising that the tax system in other countries, e.g. in Poland, operates differently. It often turns out that they negotiate gross rates when migrating to this country, assuming that the tax system works similarly to Ukraine.
Ukraine’s IT sector is export-oriented, and Ukrainian companies compete on the global market. The model of cooperation with developers based on sole proprietorships is Ukraine’s main advantage, providing an opportunity to compete on the international market and allowing for the rapid development of the Ukrainian IT industry.
Prospective changes to the law in Ukraine
For some time now, work has been underway to launch a legal platform for IT companies, the so-called “Diia City”. If an IT company meets certain criteria, then in the case of employment contracts, the taxes will be the same as in the case of sole proprietorships, with a guarantee that this framework will apply for at least 15 years.
Currently, in Ukraine, the dominant form of employment in the IT industry is sole proprietorships. The abovementioned Diia City project, a legal platform for IT business, aims to create conditions that will encourage IT companies to hire employees based on employment contracts and provide platform users with legal protection (such as intellectual property protection, or copyright protection).
Entrepreneurs operating in the IT industry (legal entities) employing at least nine people are eligible to join the Diia City project, and the average salary of an employee after conversion according to the official UAH exchange rate may not be lower than USD 1400. Users of the Diia City platform would be obliged to pay 5% income tax for employees and 5% social security contributions (the standard rates are 18% and 22% respectively).
- Instability of the sole proprietorship model – it should be noted that there is always uncertainty as to the long-term stability of the sole proprietorship model (because officials may prohibit IT companies from using this model) – there is always uncertainty as to how long it will last. Companies often avoid hiring people on employment contracts so as to reduce taxes, which has a negative impact on the industry.
- Tax relief – in order to speed up the development of the IT industry in Ukraine, the government should provide a guarantee that companies will be able to use the sole proprietorship model of cooperation for a fixed period; and / or significantly reduce the general tax burden on wages for highly skilled workers employed in accordance with general principles.
Software development in Poland
There are over 250,000 IT specialists on the market, and the IT sector in Poland employs one-third of all employees in the modern business services sector. Polish developers are ranked 2nd in the SkillValue Report ranking of programming competences, while in terms of language skills, according to the EF English Proficiency Index, Poland is ranked highly, in 16th place.
Poland: forms of employment and income tax for IT employees in Poland
Programmers are an important group of professionals in the technology sector in Poland, and the geographical dispersion of the most important service centers fosters access to specialist competences. Forms of employment in the IT industry:
- B2B contracts – this form of running one’s own business enables an IT employee to cooperate with several companies simultaneously as an independent entrepreneur. Taxes depend on the function performed – 17-32% for people in managerial positions. In Poland, entrepreneurs who run so-called sole proprietorships have freedom of choice and can use the general principles [17% of an amount up to USD 22 542,96 USD (PLN 85,528) and 32% above this amount] or a 19% flat-rate tax, lump-sum tax and a fixed amount tax.
- Employment contract – a frequently used and stable form of employment in IT. According to available data, however, wages in this model are 25-30% lower on average than in the case of B2B cooperation. Such cooperation is taxed at 17-32%, but it is widely accepted that high social security contributions are a significant disadvantage to this form of cooperation. It is also possible to employ an employee aged over 26 on the basis of an employment contract with the salary divided into the basic salary and a royalty payment. This translates into a higher net salary.
- Body leasing – a flexible form of employment that allows companies to hire IT specialists for a specific period of time (e.g. for the duration of the project). This way such employees can themselves often decide what type of contract they sign with a company that provides IT outsourcing services.
Prospective changes to the law in Poland
In Poland, work is also underway on changes to the tax system. The changes, known as the “New Deal”, would relieve less well-off taxpayers, transferring the burden to richer ones. The main changes proposed include: termination or reduction of the deductibility of health insurance contributions or part thereof from PIT; in the case of sole traders, the health insurance contribution would be proportional to their income. The ‘New Deal’ also envisages increasing the amount exempt from PIT to USD 7 907,22 (PLN 30,000) per year and raising the 32-percent tax threshold from USD 22 403,80 to USD 31 628,89 (PLN 85,000 to PLN 120,000).
According to Polish Central Statistical Office data, in 2020 the number of sole proprietorships grew at an unprecedented rate. According to economists, this may be due to the pandemic (the uncertainty associated with regular employment contracts, or the need to diversify sources of income). We do not know the full details of the proposed Act yet, but it seems that the changes will affect sole proprietorships, who would pay health insurance premiums in proportion to their income.
- A greater number of IT graduates – there is an IT competency gap throughout the European Union, including in Poland, albeit at a level below the European average. In order to respond to the growing market demand, Polish technical universities should turn out 10% more graduates than is currently the case.
- Investments in digital transformation and supporting business in the IT industry – in the era of digital transformation, there is a need for greater government support for the development of Internet of Things and Artificial Intelligence solutions, as well as the e-state (at the local and national level), in order to guarantee greater innovation.
To sum up, the similarity between forms of employment in Ukraine and Poland is that B2B and sole proprietorships are favorable in terms of the amount of remuneration. On the other hand, there is always a risk related to potential changes in the B2B or sole proprietorship model. In Ukraine, income tax is the same for all categories of employees, although people with higher incomes have the option of paying a lower unified tax for social insurance (maximum 22% of 15 minimum monthly salaries). In Poland, people with higher incomes pay more income tax. Changes in regulations are frequent, which is a challenge and requires entrepreneurs to adapt. In both countries, the possibility of different interpretations of the regulations sometimes allows them to exist in one form or another. In my opinion, both Ukraine and Poland need to create a system for employing IT workers under certain conditions. This would reduce the discrepancy between employment contracts and the B2B and sole proprietorship model, reducing the tax burden.