Defence City adopted – what is the situation with residency for Ukrainian aviation?

The Verkhovna Rada adopted in the second reading a package of draft laws that launch the Defence City special regime for the defense industry. The aviation industry previously submitted proposals for residency and considered the new initiative as a development tool. Some of its proposals were taken into account, some were not. UNN analyzed the relevant decisions and their significance for the domestic aviation industry.

Defence City draft laws adoptedThe Verkhovna Rada of Ukraine supported in the second reading a package of draft laws that launches a special legal regime, Defence City, for enterprises of the defense-industrial complex. The new mechanism is intended to become a tool for stimulating production and attracting investments in strategic industries.

The press service of the Apparatus of the Verkhovna Rada of Ukraine reported that Defence City offers:

• A register of Defence City residents, maintained by the Ministry of Defense, instead of the old List of enterprises. Resident status guarantees access to benefits and protection.
• Flexible financial requirements: a minimum of 75% of qualified income (50% for aircraft manufacturing), which opens access to the regime for a wide range of enterprises.
• Tax freedom that stimulates continuous renewal: exemption from income tax (provided reinvestment), as well as from land, real estate, and environmental taxes.
• Simplified customs procedures and export control of heavy goods; a special currency regime, determined by the National Bank, for residents.
• Voluntary approach to relocation, ensuring maximum comfort for business.

What about aviation proposals?The Ukrainian aviation community insisted that the interests of the industry be taken into account within the framework of the initiative, as its development is inextricably linked with the defense industry. Aviation enterprises ensure the technical readiness of aircraft of the Army Aviation, Air Force, and other units that daily use aviation in confronting the enemy. They modernize weapons, implement communication and defense systems, manufacture components, and ensure the technical readiness of aircraft and helicopters that perform combat and evacuation missions.

In addition, as stated by Viktor Popov, President of the Aerospace Association of Ukraine, the aviation industry is strategically important for the state – from conquering international markets and exporting technologies to preserving a multi-thousand strong personnel potential, generating budget revenues, and developing other key areas.

Immediately before the final vote in the Verkhovna Rada, calls were made to support the aviation industry. The initiative was voiced by Fedir Venislavskyi, a representative of the “Servant of the People” faction and head of the subcommittee on state security, defense, and defense innovations. During the discussion, he emphasized that the adopted laws are of key importance for aircraft manufacturing – one of the most sensitive areas of the Ukrainian economy. The deputy reminded that Ukraine is among the top ten countries in the world capable of independently manufacturing aircraft, and the developments of domestic enterprises have already proven their superiority in radio-technical characteristics over many foreign analogues.

Ultimately, aviation proposals were partially taken into account. Along with the main opportunities that Defence City opens for all participants of the initiative, the aviation industry insisted on including aircraft manufacturing entities, falling under the Law “On the Development of the Aircraft Manufacturing Industry”, which were defined by the Cabinet of Ministers as critically important for the economy, among the residents. These enterprises, in particular, specialize in the production of engines, components, and technologies that are simultaneously used in military and civil aviation. The full list of these enterprises was not included, but residency was allowed for those whose share of income from the defense sector will be at least 50%. At the same time, for entities of all other industries, the corresponding threshold is a minimum of 75%.

At the same time, aviation managed to achieve the removal of a norm that could become a “hidden bomb” for the entire defense industry: previously, it was proposed to oblige companies, in case of losing Defence City resident status, to reimburse all taxes and penalties for previous years. After discussions in parliament, retrospective sanctions were removed.

Separately, a proposal was considered to exclude restrictions on tax arrears and overdue performance of defense contracts. It concerned the possibility of including enterprises with tax arrears in the List, provided they are repaid within three years, taking into account security risks, shelling, relocation, supply disruptions, and other factors beyond the manufacturer’s control. This criterion was not fully taken into account in the final text, but its requirements were partially softened.

Despite progress, a number of proposals from the aviation community were not included in the final text of the law. In particular, initiatives to expand the grounds for including enterprises in the List of residents were not taken into account – it was proposed to consider not only Ministry of Defense contracts, but also international agreements in the field of defense and dual-use. The proposal to add financing of research and development work on aircraft manufacturing to the areas of use of tax-exempt profit was also rejected. The idea of establishing a separate procedure for the use of released funds by aircraft manufacturing entities by decision of the Cabinet of Ministers of Ukraine was also not supported.

The aviation story continues – The next chapter is coming soonDefence City is a necessary start, but for the “next chapter” of Ukrainian aviation development to be successful, the industry needs targeted solutions: long-term tax and financial incentives; models to support the full industrial cycle; financial instruments and export support; as well as other mechanisms modeled on European R&D partnerships – cooperation that accelerates technological development.

Moreover, despite all the current difficulties, Ukraine has unique assets – the “Antonov” aircraft line and technological competencies that even the most progressive states often lack. The task of state policy is not only to preserve these advantages but also to transform them into serial production, export, integration into European supply chains, high added value, and new jobs. This is how leading countries act – and this is how Ukraine will be able to multiply its achievements.