Defence City: New Rules for the Defence Business in Ukraine

One of the main outcomes was the introduction of the special legal regime of Defence City. This is a support system for MIC enterprises that combines tax incentives, special procedures, and additional requirements for companies that manufacture defence products or execute state defence contracts. The purpose of the regime is to develop the Ukrainian MIC, encourage investment in the sector, and accelerate the production of technological products necessary to ensure the state’s defence capability.

Access to Defence City incentives is granted exclusively to companies that have obtained official resident status, are entered in the relevant register, and meet the established requirements throughout the entire period of residency.

It should be recalled that the Defence City regime is intended for Ukrainian legal entities that develop or manufacture military goods, execute state defence contracts, or ensure the production cycle within the MIC. In order to obtain resident status, a company must ensure the required share of qualified income (at least 75% for the previous calendar year, and for aircraft manufacturing entities – 50%) and submit an application for resident status to the Ministry of Defence of Ukraine (the “MoD”).

What advantages does a Defence City resident receive?

For companies that meet the criteria, the regime provides, in particular:

• exemption from corporate income tax, provided that the funds saved as a result of the tax exemption are used for designated purposes;
• exemption from land tax and real estate tax in specified cases;
• exemption from environmental tax;
• the possibility to export military goods without obtaining the authorisation provided for by Article 13 of the Law of Ukraine “On State Control over International Transfers of Military and Dual-Use Commodities”; and
• simplification of procedures for importing components and equipment for the production of defence products.

What regulates Defence City?

The main legislative act in the context of Defence City is Law of Ukraine No. 4577-IX dated 21 August 2025, which introduced amendments to the Tax Code of Ukraine and other laws of Ukraine in order to support MIC enterprises. The Law defined the key terms and residency criteria, introduced tax incentive mechanisms for Defence City, and amended the Customs Code of Ukraine.

In addition, a separate section dedicated to the Defence City legal regime was added to the Law of Ukraine “On National Security of Ukraine”. It defines the duration of the regime (until 1 January 2036, but no later than the year of Ukraine’s accession to the European Union), establishes the MoD as the authority responsible for administering the regime, and sets out the general principles of supervision over residents.

At the same time, until the end of 2025, Defence City effectively remained a framework legal regime, as the basic principles were defined by law, but the procedure for obtaining resident status and the practical mechanisms for implementing the regime required further regulation.

The actual launch of the regime took place in December 2025, following the adoption by the Cabinet of Ministers of Ukraine of two resolutions regulating the procedure for the functioning of Defence City.

Resolution of the Cabinet of Ministers of Ukraine No. 1745 dated 17 December 2025 approved the procedure for submitting and reviewing an application for Defence City resident status, the rules for maintaining the Defence City Register, the methodology for calculating qualified income, the procedure for submitting and reviewing the annual compliance report, and the mechanism for monitoring compliance with the requirements and the targeted use of profit exempted from taxation.

Resolution of the Cabinet of Ministers of Ukraine 1746, dated 17 December 2025, approved the procedure for relocating Defence City enterprises and implementing measures to increase the protection of production facilities.

In practice, the adoption of these two resolutions brought the Defence City regime into operation. The MoD maintains the Defence City Register, which is not public; however, information has already appeared regarding the granting of status to the first resident.

How to obtain Defence City resident status?

The procedure for obtaining Defence City resident status provides for the adoption of an appropriate decision by the Ministry of Defence of Ukraine as the authorised body. For this purpose, the applicant company submits to the MoD an application for the granting of Defence City resident status, indicating identification details, information on types of activity and officers, information on the performance of defence contracts or participation in their performance, as well as confirmation of compliance with the established residency criteria, including:

1. registration in Ukraine and VAT payer status;
2. absence of tax debt or arrears in payment of the unified social contribution;
3. absence from the Register of Non-Profit Institutions and Organisations;
4. proper disclosure of information about ultimate beneficial owners;
5. absence of links with the Russian Federation or persons subject to sanctions;
6. proper performance of state defence contracts during the previous 12 months;
7. not being in a state of bankruptcy or termination; and
8. location outside temporarily occupied territories.

The application must be accompanied by a compliance report confirming:

• information on the resident’s compliance with the established Defence City requirements;
• information on the share of qualified income received during the reporting period in the total income received during the reporting period; and
• information on the performance, in the reporting year, of contracts confirming the amount of qualified income.

An annex to the report is the annual financial statements and the report of an audit entity on the audit of the compliance report, prepared by an auditor authorised to conduct mandatory audits of public interest entities.

The MoD reviews the application within 10 working days and adopts a decision on granting or refusing to grant the status. In the event of a positive decision, information about the company is entered into the Defence City Register, and from that moment the legal entity acquires resident status.

What is important to consider after obtaining the status?

Defence City is not a “one-off registration” mechanism. After obtaining the status, the resident is obliged to maintain compliance with the established criteria throughout the entire period of residency.

The legislation provides for the obligation to submit an annual compliance report. Failure to meet the deadline for submitting such a report or establishment of non-compliance with the requirements may serve as grounds for termination of resident status.

Particular attention should be paid to the risks associated with the application of tax incentives, in particular, the mechanism of exemption from corporate income tax. The legislation directly links the possibility of such an exemption to the obligation to use the funds for the designated purpose of developing the enterprise. Use of the released profit for purposes other than those specified may lead to additional tax assessments and, in certain cases, serve as grounds for loss of residency.

Therefore, companies considering obtaining residency should, even at the stage of preparing documents, assess not only compliance with the criteria but also their ability to maintain compliance in future operations.

Conclusion

As of early 2026, Defence City has begun to operate, and the first companies have already obtained Defence City resident status. The basic laws have been adopted, the necessary resolutions of the Cabinet of Ministers of Ukraine have been approved, and the Defence City Register is functioning.

For businesses in the defence sector, this opens up the opportunity to benefit from tax incentives and certain procedural advantages, but only subject to full compliance with the criteria established by legislation.

The result of obtaining Defence City resident status will be expanded access to foreign markets and increase investment attractiveness for resident companies.