In the “Defense City” format: how the new mode will change the rules in the defense industry

Against the background of the media focus on “Tomahawks”, “Rafale” and other extremely important positions for Ukraine, the emphasis shifted somewhat from another effective factor of the state’s defense capability. It is about the practical implementation of a special legal regime for “Defence City” manufacturers of weapons and military equipment. The corresponding package of draft laws was voted by the Parliament in August, signed by the President in September, and entered into force in October 2025.

Stimulus for reinvestment The key element of the regime is the creation of an official register of residents – manufacturers of anti-aircraft weapons under the Ministry of Defense. Resident status provides significant tax benefits: exemption from income tax (provided it is reinvested in production), as well as from land, environmental and real estate taxes. According to forecasts, this should motivate companies to invest even more in expansion and modernization of production.

Residents will receive simplified customs procedures, a special currency regime and clear financial requirements for entering the register – 75% of qualified income (related to defense activities). For aircraft manufacturers, this indicator is set at the level of 50%.

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For the safety of manufacturers, data on Defense City residents (although such a step would not be a problem for all defense and military enterprises) will be restricted in public electronic registers (EDR, registers of property rights, land cadastre, etc.) for the period of martial law and for a year after its end.

Roadmap and deadlines The initial readiness of the regime currently directly depends on the ability of the Ministry of Defense and the CMU to implement the statutory “road map” by the end of the year. This involves the preparation of a number of critically important acts: the procedure for controlling reinvested profits, the annual reporting form, the procedure for keeping the register, etc. In addition, by the end of 2026, the Ministry of Defense should launch an electronic office and create a system of interaction with residents.

The key deadline for evaluating the initial success of “Defense City” is the end of 2025. By this time, the government should fully develop the entire by-law framework. Provided all the necessary documents are accepted, the resident’s electronic cabinet and the verification commission are created in time, the first residents will be registered in January 2026.

However, even a successful start does not guarantee the success of the next stages of the reform. The initiative has high potential, but contains complex challenges that can affect its effectiveness.

Without a “club of the chosen ones” and with respect for competitors Since the Ministry of Defense received the legal right to independently form the register, it is critical to avoid bias and the creation of the so-called “club of the chosen ones”. Subjectivity or unequal competition when obtaining the status will bury a promising idea and negatively affect the confidence of investors.

No less reputational risk for the Defense City initiative can be unfair competition between current and potential residents. The consequence of such actions will be not just a “knocked down” competitor, but also undermined confidence in manufacturers in the defense industry.

It is necessary to apply all the criteria, without exception, which are a pass to the register, as transparently and carefully as possible. It is worth further studying the issue of the prohibition of dividend payments from tax-exempt profits. This ban reduces investment attractiveness due to the lack of a quick return on investment and can slow down the attraction of new capital.

Infrastructure deficit and regulatory conflicts The main financial risk is the lack of public investment in infrastructure development (roads, communications, security). The lack or untimely allocation of these funds will slow down the project.

Legislative conflicts must be avoided. The existing legal mechanisms in the field of land use, construction, export-import operations must comply with the new simplified system.

Open communication is needed with private investors who may take a wait-and-see position due to war risks. Tax and regulatory benefits should remain transparent, guaranteed and long-term. Without government orders or preferential lending, capital raising will be insignificant.

The procedure for proving the intended use of profits by producers should be as unambiguous as possible and should not create fiscal risks for enterprises that are exempt from the tax on reinvested profits.

Personnel hunger and strategic security The key operational challenge is the lack of qualified personnel – highly specialized engineers, designers and technologists. The actual availability of benefits does not solve the problem of the lack of specialists, especially in the conditions of mobilization and migration. A partial answer should be the President’s signing of Law No. 13335, which gives critical enterprises the right to 45-day reservation of specialists with improperly prepared accounting documents.

Effective mechanisms are necessary for the protection and development of critical technologies and the component base: currently, many enterprises, including UKR ARMO TECH, are actively investing in localization in order to reduce the dependence of military production on foreign components and to limit the Ukrainian defense industry to the format of assembly plants. Our goal is full cycle in key industries.

“Defence City” as a strategic format of sustainability The expected concentration of strategic objects turns the “Defence City” objects into priority targets of the enemy. This actualizes the issue of the state’s investment capacity in additional air defense equipment and the construction of underground production sites. On the other hand, the concentration of R&D and high-tech industries makes residents a target of foreign intelligence. Therefore, the highest level of physical and cyber security is required.

The adoption of the Law on “Defence City” is a strategically important step that creates a tax and customs base for the development of defense industry. At one time, UKR ARMO TECH, together with other enterprises, actively discussed this initiative in order to convey the manufacturer’s position to the legislators and the government. We carried out serious internal work on the analysis of possible risks for the enterprises of the industry and the defense sphere in general. I can state that in many respects we were listened to.

However, the success of implementation depends on the quality and transparency of regulation by the Ministry of Defense and the government. There, subjective decisions and fiscal risks for conscientious producers should be minimized. “Defence City” is not just a legal regime. This is a strategic format for the stability of defense industries and the entire state.

Gennady Khirgiy

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