No aircraft manufacturing, no full defense: why aviation should be in Defence City

Ukraine’s aviation industry, which has preserved unique competencies and critical technologies, risks being left out of one of the largest initiatives to support the defense industry — Defence City. This is due to overly strict criteria for including resident enterprises in the list that can benefit from tax and customs preferences. Because companies produce parts not only for military but also for civil aviation, they will not be able to overcome the 90% defense contract barrier proposed in the draft laws, writes UNN.

The aircraft manufacturing industry is one of the key strategic sectors for Ukraine, which not only forms the technological capability of the state but also directly ensures its defense capability in the conditions of Russia’s full-scale invasion. After all, enterprises produce critically important components for aircraft that serve both in military units and in the civilian air fleet. Currently, this allows maintaining the air component of Ukraine’s national security.

Aviation industry in stagnationAt the same time, the aviation industry found itself in a difficult situation: due to closed skies, its economic activity significantly decreased, demand for civilian aircraft fell, and state attention focused mainly on the direct production of weapons. Today, aircraft manufacturing is mentioned only in the context of arming helicopters or repairing Soviet machines, but this is critically insufficient for the survival and development of an entire industry.

The aviation industry has an officially recognized status as critically important for the state and is capable of providing a full cycle of development, production, repair, and maintenance of equipment that the Ukrainian Air Force needs today. But without state support, in particular, tax preferences, simplified regulation, increased investment attractiveness, opportunities will be irrevocably lost.

Ukraine has already lost its space industry. And if measures are not taken right now, the same could happen to aircraft manufacturing. It is the aviation industry that has the potential to become one of the drivers of Ukraine’s post-war economic recovery. Unique personnel, engineering schools, production facilities — all this can be used for export, creating international partnerships, and forming a new economic model and technological independence.

It should be noted that the need for state support for the aircraft manufacturing industry did not arise yesterday and is not new. In 2016, to support aviation enterprises, the parliament adopted a law according to which companies engaged in aircraft manufacturing received a number of benefits and preferences. This included exemption from import duties and VAT. They were also exempt from income tax and land tax.

That is, the funds that enterprises earned, they could invest in research and development, design work, in the creation and improvement of production, increasing its volumes and implementing the latest technologies.

However, these benefits, according to the law, were valid until January 1, 2025. Therefore, since the beginning of the year, the industry has been forced to survive rather than develop.

An important step in supporting aircraft manufacturing could be the extension of the Defence City concept — a large-scale state initiative to support defense industry manufacturers — to aircraft manufacturing enterprises. Aviation factories, no less than weapons manufacturers, participate in strengthening the state’s defense capability — and should have access to the same opportunities as other strategic enterprises.

In addition, Defence City provides for similar benefits and preferences that previously applied to aviation enterprises and can become a logical and quick continuation of state support.

Defence City OpportunitiesOn Friday, the Verkhovna Rada Committee on Finance, Tax and Customs Policy plans to consider draft laws that provide for amendments to the Tax and Customs Codes of Ukraine and are part of the Defence City package. This concerns the introduction of a special legal regime — a large-scale initiative aimed at systemic state support for enterprises of the defense-industrial complex. 

According to Oleksiy Leonov, a member of the VR Committee on Finance, Tax and Customs Policy, Ukraine currently has the potential to produce weapons on its own for more than $30 billion.

While we are only realizing it for $9 billion. We lack funding, and we also need to create conditions that will allow our partners to support production in Ukraine. Ukraine will develop its defense industry according to the “Danish model,” where partners purchase weapons and ammunition from Ukrainian manufacturers for the needs of the Armed Forces of Ukraine.

In total, the package includes four draft laws that provide for amendments to the Tax, Customs, Budget, and Criminal Codes. Among them, in particular, is the creation of a list of Defence City resident enterprises. Resident enterprises will have tax benefits until January 1, 2036. 

This refers to:

• exemption from income tax provided that profits are reinvested,

• abolition of land, environmental taxes and real estate tax,

• simplification of customs clearance and export control,

• information and criminal procedural protection.

“Such a support package will allow our enterprises to develop, scale up production, expand cooperation with partners, and most importantly – provide more weapons and equipment to protect Ukraine,” emphasized David Arakhamia, one of the initiators of the legislative changes and head of the “Servant of the People” faction.

What’s wrong with the resident selection criteriaThe Ministry of Defense of Ukraine will be responsible for forming the list of Defence City residents according to clearly defined criteria. Among them, for example, is the requirement that 90% of the enterprise’s contracts must be in the defense sector. However, as experts note, the current criteria for inclusion in this list are too narrow and will not allow aircraft manufacturing enterprises to receive appropriate benefits and preferences in the future.

Currently, none of the Ukrainian aircraft manufacturing enterprises, including giants such as “Motor Sich” and “Antonov,” fall under the Defence City criteria. The reason is that they are not purely defense enterprises, but rather aircraft manufacturing entities that are engaged not only in scientific, scientific and technical developments, engineering, and manufacturing of parts, but also in servicing civil aviation.

Ihor Fomin, head of the “Defense” Employers’ Federation, also noted in a comment to UNN that, according to the proposed changes, not all companies working in the defense sector will be able to get into the list of Defence City residents. He noted that the “Defense” Employers’ Federation of Ukraine, the Technological School of Economic Science, the League of Defense Enterprises, and the Aerospace Association, as well as enterprises “Antonov,” “Motor Sich,” and Ivchenko-Progress, have already submitted their proposals for the draft laws to be considered by people’s deputies and decided upon.

We agreed, and the industry associations submitted their proposals to the Committee, so that, for example, it would not be 90% of the total production, but less. The aerospace industry proposed 50%, someone else proposed 75%. This is all debatable and should be determined during the consideration (of the draft laws – ed.) by the Verkhovna Rada. First reading, and then comments and second reading.

He added that the idea of creating Defence City could be the first step to prioritize the aircraft manufacturing industry in the future.

The Aerospace Association of Ukraine confirmed that, in their opinion, the criteria by which companies will be included in the Ministry of Defense’s list also need refinement. 

The idea is generally cool, the idea is correct, we definitely support the idea. It consists in the Ministry of Defense compiling a list of enterprises that meet the Defence City concept. But there are very strict criteria that severely limit the list of potential participants.

He drew attention to a serious gap that could discriminate against the strategically important aviation industry. Currently, none of the Ukrainian aircraft manufacturing enterprises, including giants such as “Motor Sich” and “Antonov,” fall under the Defence City criteria. The reason is that they are not purely defense enterprises, as they also produce parts for civil aviation.

This is nonsense. They also have defense orders, but essentially these enterprises are engaged in aircraft manufacturing. And therefore, they cannot use the preferences laid down in the draft law.

The Aerospace Association added that the Government of Ukraine approved a list of aircraft manufacturing entities, and the association is convinced that it should be included in the Defence City concept. Melnychenko noted that to get into the government list, companies undergo a rigorous check. 

Experts propose to explicitly state in the draft laws that the benefits and preferences of Defence City should apply to defense industry enterprises included in the Ministry of Defense’s list, and also extend to the list of aircraft manufacturing entities approved by the Government.

This, in particular, will allow saving the strategic aviation industry from decline, whose enterprises also work for Ukraine’s victory in the war unleashed by Russia and fulfill state defense orders.

So, overall, the Defence City initiative is extremely important and timely. It can transform Ukraine’s defense industry into a full-fledged economic driver and stimulate the provision of critically needed weapons to the army in the conditions of Russia’s full-scale invasion. However, its full implementation requires careful refinement, so that in haste it does not turn out that someone was forgotten or something was not taken into account. Especially when it comes to strategically important sectors for the development of our state.

Ukraine cannot afford to lose any part of its defense-industrial potential, especially in the air.

RecallUkrainian aircraft manufacturers called on the authorities to preserve tax benefits for the strategic industry. The head of the VRU financial committee, Danylo Hetmantsev, during a meeting with them, suggested studying the Defense City draft laws and preparing their proposals.