IT Individual Entrepreneurs: Selecting Activity Codes and Tax Compliance

What are the peculiarities of accounting for FOPs in IT

IT business today is the most modern and innovative in Ukraine. When starting this type of business, first of all, it is necessary to decide which tax system to choose for an FOP: simplified or general.

The general tax system involves the payment of taxes calculated based on profit - income minus documented expenses, namely:

• 18% PIT
• 1.5% military levy
• payment of 22% UESV from the minimum wage.

This tax system is not optimal for IT activities. Therefore, most FOPs in the market maintain their accounting under the simplified tax system – the single tax. For FOPs, groups 2 and 3 of the single tax are offered, as groups 1 and 4 are not suitable for IT activities, since group 1 is for market stall trading and household services, and group 4 is intended for agricultural producers.

Which group to choose depends on personal needs and future plans.

When choosing Group II, an FOP will have

• maximum income size will be 834 times the minimum wage established as of January 1 of the tax (reporting) year (in 2021 - 5,004,000 hryvnias)
• can cooperate with individuals and legal entities who are single tax payers
• can hire up to 10 people
• pays single tax monthly – no more than 20% of the minimum wage
• is obliged to prepare annual reports
• cannot provide services to non-residents
• maintains accounting in any form by monthly recording of received income - in electronic or paper format
• pays UESV 22% of the minimum wage.

When choosing Group III, an FOP will have

• maximum income – 1167 times the minimum wage established as of January 1 of the tax (reporting) year (in 2021 - 7,002,000 hryvnias)
• can cooperate with individuals and legal entities without restrictions, including providing services to non-residents
• the single tax rate is 3% of the received income if the FOP is a VAT payer, and 5% of the received income if the FOP is not a VAT payer. FOPs in the IT sector are usually not VAT payers and apply a 5% rate
• is obliged to prepare quarterly and annual reports
• non-VAT payers - maintain accounting in any form by monthly recording of received income, in electronic or paper format. VAT payers - maintain accounting in any form by monthly recording of income and expenses, in electronic or paper format.
• pay UESV 22% of the minimum wage.

To understand which group is right for you, you need to clearly understand who you plan to cooperate with:

1. With individuals and legal entities under the simplified system.
2. With legal entities under the general system.
3. With foreign companies.

Since Group 2 cannot cooperate with foreign companies or with companies operating under the general tax system. Group 3, in this regard, has no restrictions, which is one of its advantages.

Also, an advantage of Group 3 is that the payment of the single tax is tied to the income received in the reporting period. Therefore, if there is no income, there is no need to pay the single tax, which differs from Group 2, where the single tax is paid regardless of whether there is income.

Which KVEDs to choose for an IT FOP

The most popular KVED for an IT FOP is KVED 62.01 Computer programming – it is most often chosen as the primary KVED.

Additional KVEDs are also quite often chosen in the IT sector:

• 62.03 "Equipment management activities"
• 62.09 "Information technology and computer system activities"
• 72.21 "Development of standard software"
• 72.10.0 "IT consulting activities"
• 72.22.0 "Other software development activities"
• 72.22 "Software development activities"
• 72.30.0 "Data processing"
• 72.40.0 "Database activities"
• 58.21 "Publishing of computer games"
• 58.29 "Publishing of other software".

It is very important for any FOP to choose the correct KVED. In case an FOP receives income from unregistered activities, they may be deprived of the right to apply the simplified system, and a tax rate of 15% will be applied to such income.

What constitutes FOP income

The income of an FOP, a single tax payer, is the income received during the reporting period in monetary form (cash and/or non-cash), material or intangible form, as defined in paragraph 292.3 of the Tax Code of Ukraine. Income expressed in foreign currency is converted into hryvnias at the official exchange rate of the hryvnia to the foreign currency, established by the National Bank of Ukraine on the date such income is received.

How and when an FOP should pay the single tax

Group 3 FOPs pay the single tax on received income within 10 calendar days after the deadline for submitting the tax declaration for the tax (reporting) period. The deadline for submitting the tax declaration is within 40 calendar days after the end of the tax (reporting) period.
Group 2 FOPs pay a fixed tax rate for each month – no more than 20% of the minimum wage established as of January 1 of the tax (reporting) year. The single tax is paid by making an advance payment no later than the 20th (inclusive) of the current month, for example, for January – by January 20.

How and when an FOP should pay UESV

The minimum UESV amount is calculated based on the minimum wage. The UESV rate is 22%. From January to November, the minimum wage will be UAH 6,000.00 per month. In December, it will be UAH 6,500. Therefore, the minimum UESV payments in 2021 will be:

From January to November inclusive — UAH 1320 (UAH 6000 × 22%) per month.

In December — UAH 1430 (UAH 6500 × 22%).

The maximum base for UESV accrual is 15 minimum wages. This is UAH 90,000 per month from January to November 2021. In December, it is UAH 97,500.

Deadlines for FOPs to pay UESV in 2021

The deadlines for UESV payment in 2021 are:

• for Q1 — April 19
• for Q2 — July 19
• for Q3 — October 19
• for Q4 — January 19, 2022.

What awaits Ukraine's IT business: government plans

The government is also considering introducing a separate group of taxpayers for IT businesses. However, it's not as simple as it seems at first glance. This is because draft laws concerning the activities of IT companies can bring both positive and negative changes.

For example, the potential introduction of the same Group 5 of single tax payers has a "plus" in that IT entrepreneurs may be granted benefits, such as a 9-month tax exemption for startups, but at the same time a "minus" – regarding an annual increase in the tax rate by 1%.

The government also talks about the possibility of creating the Human Capital Development Fund for the IT Industry – IT Creative. The funds from this Fund will go to scholarships for talented students, grants for young scientists, and the creation of educational infrastructure. It is being considered that contributions to the Fund will be voluntary within the framework of a special taxation option for FOPs in the IT industry.

This option provides for IT FOPs to pay:

• 5% single tax
• 1.5% military levy
• UESV from two minimum wages
• a human capital development levy of 1% in the year of introduction, with a gradual annual increase of 1% until it reaches 5%.

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