UKRAINE INTRODUCES SPECIAL LEGAL REGIME FOR IT COMPANIES

On 14 August 2021, the majority of provisions of Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” No. 1667-IX, dated 15 July 2021, (“Law”) came into force.

Special regime for IT companies

The Law introduces Diia City, a special legal regime for Ukrainian IT companies, for at least 25 years. To become a Diia City resident (“Resident”), a Ukrainian IT company must (1) have at least 9 employees and/or contractors engaged under special gig-contracts (with an average monthly remuneration of EUR1,200), (2) be engaged in one or several IT industries defined in the Law, (3) make at least 90% of its net income from such industry (industries) and (4) submit a respective application to the Ministry of Digital Transformation. The Law additionally defines a list of companies that may not qualify as the Residents (for example, companies with a state-owned stake of at least 25%).

The Residents will enjoy certain legal benefits, including:

• the right to regulate relations with their employees in a more discretionary way
• the right to engage IT specialists and other contractors under civil-law gig-contracts that are not subject to the requirements of Ukrainian labour law. Meanwhile, such IT specialists and other contractors will be eligible for certain social benefits provided by the Law (for example, vacation and social security)
• the right to enter into non-compete and non-disclosure agreements with their employees and contractors
• the right to enter into convertible loan agreements with their creditors 
• the right to use analogues of certain English law instruments in the agreements entered into by the Residents or in respect of their shares (including warranties and representations, the breach of which leads to payment of penalty or compensation, and indemnities) 
• the right to establish certain liquidation preferences for their shareholders and creditors
• the right to engage a legal entity as their external manager (for the Residents being limited liability and additional liability companies (“LLCs” and “ALCs”) only)

The Ukrainian Parliament is also considering Draft Law No. 5376 anticipating tax benefits for the Residents. The Diia City regime is expected to start its operation in 2022 after all required bylaws are adopted.

Corporate, IP and contract law changes

The Law also introduces a number of important changes and clarifications applicable not only to the Residents but to all Ukrainian companies, including the following:

• parties may expressly incorporate warranties and representations (the breach of which leads to damages) into their agreements
• shareholders’ agreements (“ShAs”) in respect of companies with a foreign shareholder may be governed by foreign law
• LLCs, ALCs and third parties (for example, their creditors) may be parties to the ShAs in respect of such LLCs and ALCs
• charter capitals of LLCs and ALCs may be increased by set-off
• option agreements in respect of LLCs’ and ALCs’ shares must contain certain mandatory provisions
• a customer owns proprietary IP rights to copyrighted works (for example, software) created by its contractor unless the respective contract or law provides otherwise
• an employer owns proprietary IP rights to software and databases created by its employee unless the agreement with such employee provides otherwise