“Private defense enterprises of Ukraine continue to develop rapidly, in particular thanks to investments in the defense technology sector and the numerous jobs they create. Against this background, a package of draft laws on the creation of a special legal zone of Defense City appeared in Parliament, which should stimulate the development of the defense industry through tax benefits and simplified regulation. But will these initiatives be a breakthrough for […]”, – WRITE: Businessua.com.ua
Private defense enterprises of Ukraine continue to develop rapidly, in particular thanks to investments in the defense technology sector and numerous workplaces they Create. Against this background, a package of draft laws on the creation of a special legal zone of Defense City appeared in Parliament, which should stimulate the development of the defense industry through tax benefits and simplified regulation. But will these initiatives be a breakthrough for the sector? Critical analysis of the legal regime from Igor Fedirko, Executive Director of the Ukrainian Council of Weapons.
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Over the past two years, private defense enterprises of Ukraine have shown that they can simultaneously support the front and entail the economy. It was the defense defense that provided a third of GDP growth in 2024, created tens of thousands of jobs and attracted the first serious rounds of foreign private capital in Defense-Tech.
Against this background, the Parliament appeared in the Defense City bill, a special legal regime designed to stimulate the industry with privileges and simplified regulation.
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The idea is ambitious. But is it able to turn the industry’s development into a system breakthrough?
The idea of a parliamentary package is simple and clear. A company that gets to a special list of residents receives:
- zero income tax rate provided reinvestment;
- is exempted from land, environmental taxes and movable property;
- simplified customs and export procedures;
- Hidden sensitive data from public registers.
An additional bonus is the ability to relate capacity in “safe territories”, leaving half of the PIT in a recipient community, which will be aimed at improving the infrastructure of the enterprise itself.
A tax “fork” is also introduced: a company can choose either a preferential regime with full reinvestment of profit, or to pay a standard rate and pay dividends to owners.
The right of choice is the basic confidence signal for the investor. The list of residents will be approved by the Ministry of Defense.
Those who:
- receives at least 90% (discuss 80%) income from the supply of weapons and military equipment;
- has no tax debts and works outside other special regiments;
- will agree to move the legal address to the recommended territories.
What of this really works The idea of stimulating investments because of zero income tax rate for reinvestment – Unconditional plus. This allows you to accumulate capital within the country, not to eat cashflow on penalties and penalties, but to direct it to R&D, modernization and salaries to engineers.
The second strong block – Protecting sensitive information. Hidden addresses and financial statements dramatically reduce the risk of sabotage and industrial splitting, which is now, to say the least, not superfluous.
Finally, The 50% PIT mechanism that remains in the recipient community budgetmakes relaxation mutually beneficial: these funds are directed directly to the development and modernization of the infrastructure of the enterprise: roads, electricity, access tracks, engineering networks.
In addition, such a community is exempted from paying reverse subsidies to the state budget, which creates another fiscal incentive.
If the relaxation remains the right, not a compulsory condition, everyone will win: the company receives a safe production base and better logistics, and the region is new jobs and stable tax resources.
For an industry that works under permanent missile shelling and currency restrictions, such tools can really become a sip of oxygen. The weapon board is supported by each of these points.
Where the system fails Inside the package there are restrictions that can significantly narrow the potential of reform.
Residents plan to include about a hundred businesses – mostly large serial plants with a share of “net” defense income of more than 80%. Such a configuration may not cover the flexible R&D teams, manufacturers of Dual-US-Roses, young design bureaus and startup cluster Brave1.
As a result, there is a risk that innovative technologies that are already changing the nature of the war will remain outside the special regime, and competition in the market will receive less space for development.
Secondly, forced relaxation remains in the package. Any company that claims the regime is theoretically obliged to move Jradress and production lines to certain “calm regions”. Transfer of production lines is not a box with a drone. These are years of permits, logistics and certification.
In practice, this means many months of stops, new permits, loss of staff and partnership contracts. Instead of the stimulus – a barrier that can aircraft Potential participants.
Third, the current version provides for a very broad release of residents from liability for economic and official offenses, in particular committed before the status is committed. In this embodiment, it has a very comprehensive appearance and can be perceived as “hyperistics”, which creates reputational risks and alarm international partners.
Instead of almost complete integrity, it is advisable to clearly define an exhaustive list of offenses that are subject to privileges. This will protect the manufacturers from unfounded pressure without legalizing potential abuse at the same time.
And last. In the case of leaving the regime or breach of conditions, the state proposes to charge all “unpaid” taxes and penalties for the entire period of participation. Such a shock mechanism makes the risks unprocessed and offset the very essence of the stimulus.
How to turn the idea into a springboard for Development Development Before adopting in the second reading, we urge the deputies to make several fundamental editions.
Expand the list of residents. Reduce the requirements for the share of income from their own production from 90% to 80%. It is necessary to expand categories of activity: Double-use (Dual-US) products and technologies should be added to weapons and military equipment.
Turn a relaxation into a right, not an obligation. A fiscal stimulus in the form of 50% PIT and it works. Coercion only undermines supply chains and demotivates business.
To abandon retroactive sanctions. Taxes should start accrued only from the date of exclusion of the enterprise from the list – from the moment of loss of preferential status. All the periods when the company has legally used dismissal is not subject to any taxes, penalties or penalties.
Changes to the Criminal Code. The weapon council is in favor of minimizing corruption risks and offers the following mechanism: as long as the martial law continues and two years after it, no investigator can seize or arrest the equipment and materials required by the defense contract.
This can only be done in the presence of strong evidence and only through special processing: the meeting is obliged to participate a representative of the Ministry of Defense, and the court makes a decision for a maximum of five days.
Such structural changes are not made in a week or two. It is necessary to act in care: instead of the hasty “patch” of the codes to develop a separate framework law on Defense City. It is this approach – as in the case of “Action.City” – provides transparent rules, flexibility for the fast editing and trust of investors.
Why not the idea should not give up In 2025, Ukrainian companies have already signed agreements with foreign partners of more than € 2 billion, and even larger prospects – on the horizon. We need a regime that does not deter the capital with excessive conditions, but scales it.
Defense City in the current edition is a good start. But the editorial board will determine whether it will be a landfill only for the chosen or platform, where every engineering idea goes from drawing to series without artificial barriers.
Ukraine has already become a world R&D-hub asymmetric technologies. It is time to support this leadership thoughtful tax and legal infrastructure. Defense City can be its foundation if we improve this tool and make it wider and flexible to the entire industry.
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