Defence City — Too Attractive an Offer to Refuse

On 24 May 1945, twenty Mitsubishi Ki-21 aircraft carrying soldiers of the Japanese Army's elite Giretsu Kuteitai took off towards Okinawa to destroy the main threat — American B-29 strategic bombers. The paratroopers who survived the landing destroyed 9 American aircraft and damaged a further 29, inflicting — at the cost of their own lives — the greatest single-day ground losses on US strategic aviation in its entire history. Yet this well-known historical episode vividly illustrates that individual heroism cannot secure a decisive victory if the adversary consistently pursues a systematic and coordinated defence policy. After all, by early 1945 the US was producing more than 300 bombers a month, so the paratroopers' feats only confirmed that wars are won not so much by self-sacrifice as by far-sighted, systematic state policy aimed at maximising defence-industrial potential.

Guided by this logic, a number of legal acts were developed and adopted, in particular draft laws No. 13420 and No. 13421 amending the Tax Code and the Customs Code respectively, as well as Resolution of the Cabinet of Ministers of Ukraine No. 1745 of 30 December 2025, 'Certain Issues of the Legal Regime of Defence City.' Taken together, these measures are aimed at the practical implementation of the previously formulated concept of a 'Ukrainian defence miracle,' which envisages a systematic strengthening of the state's defence-industrial potential.

Defence City provides tax, customs, and regulatory preferences for defence-industry enterprises in order to accelerate their scaling and development in the interests of the security and defence sector. Its first resident has already become SkyFall, a manufacturer of UAV interception systems and one of the key Ukrainian miltech players specialising in UAVs, in particular interceptor drones. So what preferences does Defence City offer business, what is the procedure for joining, and what are the requirements for obtaining resident status?

It should be emphasised at the outset that, under the amendments to the Tax Code of Ukraine, Defence City residents are exempt from a significant portion of mandatory payments:

• From corporate profit tax — upon submission by the resident of the relevant application. An important condition, however, is that such profit must be directed towards scaling and improving the resident's defence production.

At the same time, Defence City residents are required to ensure that transactions involving the use of tax-exempt profit are reflected in their accounting, tax, and financial records, while the monitoring of the expenditure of these funds is carried out by the Ministry of Defence on the basis of information received from the State Tax Service. It is worth noting that even where formalised accounting and control procedures exist, they are not always capable of fully eliminating the risk of misuse of funds — figuratively speaking, the purchase, using 'saved' taxes, of sports cars designated for 'the transport of ammunition and explosives.' But precisely for this reason, a separate procedure for controlling the use of tax-exempt profit has been approved.

• From land tax on plots on which production facilities used in the resident's business activities are located, and on plots temporarily not in use owing to relocation.
• From tax on immovable property other than land — namely, real estate located in the populated area chosen for relocation, provided that such property is not leased, rented out, or lent, and is used in the resident's business activities or for the accommodation of its employees.
• From payment of environmental tax — with great respect for environmental protection, the state nonetheless focuses on defence capability.

At the same time, these benefits are available only on condition that the company does not hold Diia City resident status and does not apply the corresponding tax preferences. In effect, businesses will have to choose between Defence City and Diia City, since the simultaneous use of the two tax regimes is not provided for by law.

• Corresponding amendments were also made to the Customs Code of Ukraine, in particular: resident legal entities are exempt from the obligation to provide information on the location of goods and information on the movement of goods between different places within the customs territory of Ukraine.
• The limitation on the validity period of the authorisation to place goods under the customs regimes of import, processing within the customs territory, or processing outside the customs territory, granted on the basis of a customs declaration, does not apply to residents.
• Residents are not required, by amending a customs declaration, to notify of an intention to transfer rights and obligations to another enterprise or of the use of equivalent goods.

In addition, a resident may request the protection of data related to the conduct of its business activities. Thus, under the Procedure for Restricting Access to Public Electronic Registers as regards information about Defence City residents, the latter may apply to the Ministry of Defence stating the need to restrict access and specifying the list of public electronic registers, or particular information from them, to which access must be restricted.

Under the provisions of the Law 'On State Secrets,' information on the research and development of new weapons, on the results of such research and development, and on ensuring the production activities of national economic facilities in wartime constitutes a state secret. Therefore, a Defence City resident's data must be protected on a par with information about the personnel of the Special Operations Forces, where access to it is restricted.

Another advantage is that, at the resident's initiative, its production capacities may be relocated, provided that the enterprise has been engaged in the production of defence goods for at least one reporting year and that its workforce numbers at least 30 people.

Relocation is defined as a set of organisational measures aimed at changing the location and transferring the actual place of activity or the production capacities of a Defence City resident to another territory of Ukraine.

Procedurally, it is provided that the Ministry of Defence of Ukraine, within three working days of receiving a relocation application, forwards it to the relevant regional state (military) administrations identified by the resident as priorities for relocation. In turn, those administrations facilitate the inspection of production premises, land plots, and other facilities with a view to agreeing the enterprise's new location, and assist in organising the relocation process itself.

Thus, a Defence City resident is exempt from paying the lion's share of taxes, obtains significant customs preferences and the right to restrict access to register data upon request, as well as state support in changing the region of its business activities to one that is more secure and economically viable. These advantages undoubtedly create conditions for rapid development compared with enterprises that are not Defence City residents and de facto mean that obtaining the relevant status is a prerequisite for building a competitive enterprise in the defence-industrial sector.

So what are the conditions for obtaining the 'golden fleece' of the Ukrainian defence industry?

First, under the provisions of the Law 'On National Security,' to obtain Defence City resident status a legal entity must have a share of qualified income of at least 75% of total income (or at least 50% for aircraft-building entities), determined from the sale of defence goods of its own production and the performance of work on the development, manufacture, repair, modernisation, or disposal of defence goods.

Notably, qualified income also includes income from the sale of materials, components, and parts supplied to a Defence City resident for the direct manufacture of defence goods. This approach makes it possible to strengthen stable production chains.

Second, the company must be registered in Ukraine and be a corporate profit tax payer, and must have no tax debt.

In addition, attention should be paid to the restrictions on acquiring resident status. In particular, a legal entity will not become a resident if it:

• has breached the requirements of the law on the disclosure of information about ultimate beneficial owners and the ownership structure;
• has been found, within the last twelve months, to have breached its obligations under a state contract for defence procurement;
• is located or operates in temporarily occupied territory;
• is owned, beneficially held, or participated in by citizens of countries carrying out armed aggression against Ukraine, by sanctioned persons, or by persons included in the list of those associated with terrorist activity.

To sum up, in practice resident status may be claimed by a defence company that has no ties to Russia or sanctioned persons and that conducts its business responsibly — fulfilling the terms of the contracts it has concluded and paying taxes — which are fairly modest requirements given the preferences on offer.

The procedure for obtaining the status involves submitting an application, which is reviewed by the Ministry of Defence within 10 days, following which the relevant decision is taken.

A significant advantage of Defence City residency — compared, for example, with obtaining the status of an exporter of dual-use or military goods — is the existence of clearly defined and approved requirements for acquiring resident status, as well as an exhaustive list of documents confirming compliance with those requirements. Thus, where an enterprise meets the established criteria, resident status should be granted irrespective of the decisions of commissions, the subjective attitude of individual Ministry of Defence representatives, or other discretionary factors.

At the same time, the business opportunities and preferences provided under the Defence City regime make it important to ensure maximum transparency and clarity of procedures, both at the stage of granting resident status and during the subsequent operation of the cluster.

Meanwhile, the regulated status of Defence City undoubtedly creates conditions for the expansive development of Ukraine's defence-industrial complex, which is evolving from a 'top-down instruction to produce something poor but already mastered' into a state policy of seeking effective solutions and creating the best conditions for their implementation.

Defence City may become one of the most ambitious attempts by the state to systematically rebuild Ukraine's defence-industrial sector. If the mechanism works transparently, without excessive bureaucracy and manual administration, Ukraine has a chance not only to scale its own defence-tech market but also to attract international manufacturers and investors. In the global defence economy, the winners are not only those who have the technology, but also those capable of creating predictable rules of the game for it.

Yevheniia Sudarikova, Senior Associate, and Volodymyr Romanchuk, Associate at LCF Law Group, exclusively for Okrema Dumka.