The IT industry in Poland and Ukraine – legal regulations, state support, development directions – part 1.

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 IT 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 IT professionals’ 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 tech giants 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

Salaries in the custom software development services account for about 80% of a company’s expenses (due to the high level of salaries). In traditional sectors of the economy, workers’ salaries do not tend to exceed 10% of expenditure. This is why taxes are a key factor for the IT industry, certainly when compared to most sectors of the economy.

Currently, most software engineers in Ukraine cooperate with companies as single-person enterprises on a contract basis. Most such people are included in the third group of the simplified taxation system.

A simplified tax system for such sole proprietorships has been operating in Ukraine since 1998 with the aim of developing small businesses. Such a system not only reduces the tax burden, but also greatly facilitates the accounting process. However, there are also certain limitations (a list of types of activity allowed, number of employees, maximum income). There are four such groups. The first two are mainly related to retail, small producers and restaurants. The 4th group is for agricultural enterprises. The 3rd group has a larger list of activities and a limit of USD 251 660,52 (UAH 7 million) per year when it comes to turnover.

Polish market vs Ukrainian market – legal regulations

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).

An alternative model is hiring regular employees, for which the applicable tax rates are as follows:

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 Ukrainian programmers 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 a software development 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).

Main challenges

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

WHY POLAND

Outsourcing software development to Poland

Why do global companies outsource software development to Poland? Here are some of the most important factors:

• Skilled software developers
• Remarkable English proficiency among Polish software developers
• Affordable hiring prices
• Good quality digital solutions
• Many industry centers attract foreign clients and foreign investors
• The rapid growth of the Polish economy
• Services provided for various industries with the use of various technologies
• Good nearshoring cooperation with many countries from Western Europe

According to the “IT and telecommunications market in Poland 2020” report, prepared by the Polish Chamber of Information Technology and Telecommunications together with IDC, the IT industry in Poland currently accounts for an 8% share of the country’s GDP.

Polish software developers

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 software developers are ranked 2nd in the SkillValue Report ranking of programming competencies, 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 Polish programmers to cooperate with several software development 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 the IT sector. 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.

Read more: Custom software development – Poland

Changes to the law in Poland in 2022

The changes, known as the “New Deal ” came into force at the beginning of 2022. The concept is to relieve less well-off 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.

Main challenges

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.

IT industry in Poland and Ukraine – summary

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.