Supply of IT services and software products is the most rapidly developing economic sphere in the world and, in particular, in Ukraine. In 2017, Ukraine was recognized as the best country to provide IT outsourcing services1 , with a total export volume of approximately USD 3.6 billion (third place in contribution to the GDP of Ukraine after agriculture and metallurgy).
Considering the high level of competition on the world market of software development, the Ukrainian government introduced a few tax benefits for transactions on supply of software products to maintain the competitiveness of domestic software developers.
According to the provisions of the Tax Code of Ukraine, the supply of software products as well as transactions with software products for which the payment is not deemed to be royalties are temporarily VAT exempt until the end of 2022. This exemption does not cover transactions on the transfer of software rights, payments for which are considered as royalties, as such transactions are VAT-exempt under the general rule.
Taking into account that software products are constantly changing and evolving, in order to apply the above VAT exemption, it is necessary to understand what is included in “software products”. Based on the definition given in the Tax Code itself, “software products” include the results of computer programming in the form of operating systems, computer programs or their components, any changes, updates, add-ons for computer programs, websites, cloud-based services, as well as cryptographic information security tools.
As no questions usually arise when it comes to the supply of operating systems or computer programs, some problems may still appear in case of the supply of cloud-based services. Local tax authorities further explain that the supply of cloud-based services is VAT-exempt when the customer gets the right to use the software as an end-user for its own purposes (e.g., storage of data or online accounting services). Whereas the mere provision of information or specific data with the use of cloud-based services without granting the customer actual access to the software itself will not entitle software suppliers to apply the VAT exemption.
Another issue that may arise is that contracts between software suppliers and their customers are not always limited to the supply of software products but also include the provision of support-related and other accompanying services. If such accompanying services are indistinguishably linked to the software products and included in their price (e.g., installation, setup, testing, fixing bugs, etc.), they are also exempt from VAT. But in cases when accompanying services are not included in the price of software products and/or provide for further technical assistance in the course of the use of the software, such services are not considered VAT-exempt. In the latter case, the supply of software products and the supply of accompanying services must be split in the contract and regarded as separate transactions, one of which will be VAT-exempt and the other not.
In order to avoid any mistakes with accruing and paying VAT for transactions on the supply of software products, the parties should thoroughly stipulate the contractual terms, determine whether the supplied software products and accompanying services are covered by the VAT exemption and split the contract if at least one of the transactions within its framework is VATable.
1 According to the data provided by Global Sourcing Association