Cancellation of VAT exemption for IT companies
From January 1, 2023, IT companies in Ukraine have lost the VAT exemption — what does this mean for business and how to adapt
May 06, 2023
Starting from January 1, 2023, the VAT exemption for software product supply services has been discontinued.
We remind you that from January 1, 2013, to January 1, 2023, operations related to the supply of software products, as well as operations with software products for which the payment is not considered royalties, were exempt from VAT taxation.
The main arguments presented by the authorities justifying the need to abolish this exemption are:
- Extending the exemption period will lead to losses in state budget revenues, specifically to a shortfall in VAT revenue to the budget (conclusion of the Committee of the Verkhovna Rada of Ukraine on Budget Issues);
- Extending the exemption period will violate Ukraine's international legal obligations regarding European integration (conclusion of the Committee of the Verkhovna Rada of Ukraine on Ukraine's Integration into the European Union).
From the perspective of business representatives, the necessity of taxing VAT on software product supply operations will lead to the cancellation of a number of investment projects, including in the military-tech sector.
We have been closely monitoring this issue. Our team participated in public discussions on this topic with representatives of the state authorities, public organizations, and within business communities.
Additionally, we asked our clients how the cancellation of the exemption has affected their business and whether this event could significantly impact the future of Ukrainian IT.
The questions we asked our clients:
- How exactly has the cancellation of the VAT exemption affected the company's operations, and has the work changed at all since January 1 (in terms of accounting and tax payments)?
- Does the administration and payment of VAT cause any difficulties?
- Has the cancellation of the exemption led to price increases for your clients?
- Will the presence of VAT in the cost of services affect the competitiveness of companies?
The responses we received demonstrate two key positions that have emerged today in the IT community.
The first position is that the cancellation of the exemption has not affected the company's operations, as such a company is not a VAT payer, or the majority of its income is generated from the export of IT services and software. Overall, representatives of this position do not consider the cancellation of such an exemption critical.
The second position is fundamentally different. Companies that are VAT payers have felt the cancellation of the exemption and emphasize that a key factor in this cancellation is the slowdown in technological development for consumers of IT services — representatives of small and medium-sized businesses who systematically use software from Ukrainian developers (CRM, Virtual PBX, ERP, etc.).
Moreover, the increase in costs for purchasing software by consumers is directly related to the fact that from January 1, 2023, developers are forced to include VAT at a rate of 20% in the cost of such software, which represents a significant increase in expenses for consumers.
As a result, small and medium-sized businesses are losing the financial ability to implement modern IT tools (CRM, Virtual PBX, ERP, etc.), the integration of which optimizes processes and helps scale, making business more efficient.
In addition, the cancellation of the VAT exemption also affects Ukraine's defense industry.
The emergence of VAT in the final cost of software development services will force manufacturers in the military-tech sector to attract additional investments for their projects, which, given the current economic situation, may lead to the closure of a number of projects in this area due to insufficient funding.
The consequence of this may be a decrease in the effectiveness of Ukraine's defense industry due to the absence of modern Ukrainian software in weapon samples.
Currently, a draft law of Ukraine "On Amendments to Subsection 2 of Section XX 'Transitional Provisions' of the Tax Code of Ukraine (regarding the extension of the features of taxation of software products)" No. 7611 dated July 28, 2022, is registered in the Verkhovna Rada of Ukraine. It is proposed to extend the VAT exemption period for operations related to the supply of software products, as well as operations with software products for which the payment is not considered royalties until January 1, 2028.
The specified draft law was received by the Verkhovna Rada on July 28, 2022, and provided for review on August 1, 2022, but it has still not been considered.
We certainly understand the positions of supporters from both "camps." However, in our opinion, the most pressing issue is the possibility of exempting from VAT companies that develop software in the military-tech sector.
As practice in the implementation of tax policy in the field of VAT in the EU and the UK shows, operations related to the supply of software products are not exempt from VAT (VAT) and are generally taxed at a rate of 20%.
At the same time, in our opinion, the experience of foreign partners should be borrowed with consideration for strengthening the country's defense industry.
In light of this, continuing the successful experiment of VAT exemption for at least developers of software for the defense of the country, in our opinion, seems appropriate.