Agenda

DEFENCE CITY CONCEPT AND ITS NOVELTIES FOR DEFENCE-INDUSTRIAL COMPLEX

02/09/2025

 

On 21 August, 2025 the Verkhovna Rada of Ukraine adopted the Laws No. 13420 (amendments to the Tax Code) and No. 13421 (amendments to the Customs Code) for the implementation of the Defence City concept.

What is Defence City Concept?

Special tax and legal regimes that fascilitate companies connected to defence industry in Ukraine. These regimes are valid until 1 January 2036 or until Ukraine’s accession to the EU.

Conditions to become a Resident of Defence City maintained by the Ministry of Defence of Ukraine:

  • Be a legal entity registered in Ukraine.
  • Be located in regions definied by the Ministry of Defence.
  • Derive at least 90% of its income from activities in the defence sector (sale of its own products, performance of work or provision of services). This requirement must be met both 1 year prior to submitting the application and on a quarterly basis throughout the entire period of residency.

Conditions for Refusal in Residency:

  • Companies are not income tax payers on general grounds. For instance, it is a non-profit organisation or already applies special tax regimes, such as Dіia City. This also involves legal entities that are on a simplified taxation system.
  • In case of ties with an aggressor state or countries on the FATF (Financial Action Task Force) blacklist.
  • If it is a subject to Ukrainian or international sanctions.
  • A poor financial or business reputation (bankruptcy, the process of termination, tax debt).
  • Delay in fulfilment of a defence contract through its own fault for more than 60 days during the last year.

Benefits for Residents

1) Exemption from several taxes until 1 January 2036:

  • income tax
  • land tax
  • tax on immovable property other than land
  • environmental tax

2) The company will be required to allocate all exempted profits to development (re-equipment, expansion of production, R&D, etc.) no later than the end of the following year.

3) A resident company is not entitled to pay dividends to its owners. If a company violates these conditions or is removed from the list, it loses its right to the privilege. In this case, it will be required to submit revised declarations for all previous periods, as well as pay taxes, fines and penalties.

4) Simplifications to speed up business operations:

  • Simpler customs rules. Resident companies will find it easier to go through customs procedures, for example, when importing equipment for processing or temporary use.
  • Easier exports. To sell weapons and dual-use goods abroad, it will be necessary to obtain a licence by paying a special fee to a distinguished account of the Ministry of Defence.
  • Fast approval for the export of technologies (15 days)
  • Confidentiality. All information about legal entities from the list in the Unified State Register will become restricted access information and will not be publicly available. At the same time, the financial and statistical reports of residents will not be subject to disclosure during the period of martial law and for 3 months after its end.

5) Resident companies are also being offered a mechanism for relocation to safer regions. During 2026-2028, half of the tax on company employees' salaries will go to the budget of the community to which the enterprise has moved with obligation to spend this money on helping the same enterprise.

6) Legal guarantees to protect residents from criminal prosecution. A defence contract will not be considered a criminal offence if it meets such conditions as:

  • It was aimed at the proper performance of the contract.
  • It was necessary to achieve a significant socially useful goal (strengthening defence capabilities).
  • It did not pose a threat to human life or risk an environmental disaster.

7) An annual compliance report is provided by annual financial statements and an audit report with deadline (by 1 June following the year of actual report).

Conclusion

Defence City concept offers opportunities for defence industry in Ukraine. Special tax and legal regimes provide several privileges for the residents, such as tax incentives, simplified customs procedures and exports, and protection of information. In addition to this, duration of application for residency is ten days, which allows to facilitate business activity.

 

NAZALI TAX & LEGAL

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This document provides general information on the subject and does not constitute a legal opinion or recommendation. Consulting a specialist is recommended before taking an action. No claim arising from the content of or relating to this document can be asserted against NAZALI.