The idea is strong, but needs refinement: expert advised how to make Defence City successful

The idea of creating Defence City for enterprises of the defense-industrial complex, which provides for a number of benefits and preferences, is a powerful and necessary initiative that can become a real breakthrough in the development of the Ukrainian defense industry. At the same time, for the effective launch of this legal regime, specific changes to the proposed draft laws are needed. This opinion was expressed by Serhiy Zgurets, director of the information and consulting company Defense Express, UNN writes.

Among his main proposals is to soften the requirement that for joining Defence City, an enterprise must receive at least 90% of its income from defense orders per year.

“To be a resident of Defence City, at least 90% of the company’s total income must come from the supply of goods, works, and services for defense purposes. Moreover, if such a result is required for entry for a year, then it is necessary to report quarterly thereafter. It turns out that if the result in the quarter was 89% of the total income, then penalties will be imposed. This creates unnecessary challenges. Therefore, it is appropriate to reduce these indicators. This will allow companies with dual-use products that serve both military and civilian spheres to join,” noted Zgurets.

In addition, he believes that a number of other amendments should be made to the draft laws, which provide for amendments to the Tax and Customs Codes, which have already been passed by the Verkhovna Rada in the first reading. In particular, the term for reinvesting profits, released through benefits and preferences, should be extended from one to two years. This, according to Zgurets, will allow businesses to better plan large-scale projects;

It is also worth simplifying the rules for exporting technologies to create joint ventures with international partners, the expert is convinced. According to him, the current requirements for 100% Ukrainian ownership and the mandatory nature of interdepartmental agreements with the Ministry of Defense complicate this process and carry corruption risks.

Zgurets added that the mechanism for exclusion from the Defence City register should be transparent, as currently it is proposed to grant this right exclusively to the Ministry of Defense. According to the expert, the decision to exclude a resident should be based solely on a court decision that would confirm the existence of violations of the terms of stay in the legal regime.

Zgurets also draws attention to the need to reduce the influence of manual control, as the proposed versions of the draft laws on the creation of Defence City provide for the concentration of large powers in one department.

The expert also had questions about the approach to the relocation of enterprises due to the war to safer regions. 

The survival and stability of the state directly depend on the development and potential of our defense industry. The dynamics of changes in the domestic defense industry significantly accelerated after the full-scale invasion of the Russian Federation in February 2022. But limitations and imperfections of legislation, the inflexibility of regulatory bodies, the threat of Russian shelling, funding limitations, and a shortage of components significantly limit the scaling of qualitative transformations in the industry. To remove these obstacles, it is proposed to create a special regime, Defence City. It should be similar to Diia City, which exists for the IT industry 

Let’s addThe need to finalize the initiative to create Defence City is also emphasized by representatives of the aviation industry. They warn about the risk of excluding their sector from the circle of potential Defence City residents – despite its critical role in supporting, repairing, and modernizing the aircraft fleet operated by the Ukrainian military. Industry experts point out that the current version of the draft laws actually limits the possibility of participation for most aircraft manufacturing and aircraft repair enterprises, as it requires that the share of defense products be at least 90% of the revenue structure. However, even industry flagships – such as SE “Antonov”, “Motor Sich” and other private contractors of state contracts – do not meet these criteria and may remain outside the Defence City initiative.

The Aerospace Association of Ukraine insists on the direct inclusion of the aircraft manufacturing industry in the draft laws from the Defence City package. The President of the Association, in a comment to UNN, explained that since January 1, 2025, aircraft manufacturing enterprises have lost state support, and the new initiative is a chance for them to receive the benefits and preferences necessary for the normal functioning and development of the industry.

RecallOn July 16, the Verkhovna Rada of Ukraine adopted in the first reading three key draft laws aimed at introducing a special legal regime of Defence City – to support the domestic defense-industrial complex. The documents provide for tax, customs, and budget benefits for participants of the special regime – until 2036. 

This refers to exemption from income tax provided that it is reinvested, abolition of land, environmental taxes and real estate tax, simplification of customs clearance and export control,

On the eve of the vote, experts emphasized that these are only the first steps in creating a systemic mechanism for supporting strategic industries, which Ukraine has needed for a long time.