Significant changes for Ukrainian IT business: from January 1, 2023, the supply of software products will be subject to VAT

The VAT exemption for the supply of software products, will expire on December 31, 2022.

Starting from January 1, 2023, the supply of software products and operations with software products, the payment for which is not considered as royalty, will be subject to VAT on a general basis, considering the place of supply.

Software products include:

the result of computer programming in the form of - operating system, entertainment and/or educational computer program (or their components), Internet sites and/or online services and access to them;
copies of computer programs, their parts, components in material and/or electronic form, including in the form of codes and/or links for downloading the computer program and/or their parts, components in the form of codes for activating a computer program or in another form;
any changes, updates, applications, additions and/or expansion of the functionality of computer programs, the right to receive such updates, changes, applications, additions within a certain period of time;
cryptographic tools of information protection.

Thus, if the supply of software products and operations with software products, the payment for which is not considered as royalty, takes place in the customs territory of Ukraine, such transactions are subject to VAT at the rate of 20%.

The supply of software products and operations with software products is subject to VAT according to the general rule of the first event. In case the first event (advance payment or supply) in relation to the supply of the software product or the transaction with the software product occurred till December 31, 2022 (including), the transaction is exempted from VAT.

In the case of partial payment under contracts concluded in 2022, taxation would be as follows:

The installment of the software products that was paid or supplied up to December 31, 2022 (including) is exempted from VAT;
The installment, the first event of which will take place starting from January 1, 2023, is subject to VAT.