Defense City: legal and tax regime in Ukraine for defense-industrial sector

Defense City regime is already fully operational and will remain in force until January 1, 2036, with tax benefits applicable until that date, but no later than the year of Ukraine’s accession to the European Union.

Eligibility criteria for residency

To obtain a Defense City resident status, a legal entity must meet a set of requirements. In particular:

• at least 75% of total income for the previous calendar year must come from the supply of defense products of own production, performance of works, provision of services related to the development, manufacturing, repair, modernization, or disposal of such products (for aircraft manufacturers – at least 50%);
• the entity must be registered under Ukrainian law and be a corporate income tax payer.

In addition, the legal entity shall not be subject to certain circumstances that preclude obtaining Defense City resident status, including, inter alia: ties with the aggressor state, a recent court-confirmed breach of a state defense procurement contract, bankruptcy or liquidation proceedings, tax or unified social contribution arrears exceeding statutory thresholds, violations regarding disclosure of ownership structure and/or ultimate beneficial owners, as well as some other circumstances established by law.

It is important to note that a Defense City resident must comply with the above-mentioned requirements throughout the entire period of residency. 

Tax incentives 

The Defense City legal regime offers significant tax benefits for its residents.

The main one is exemption from corporate income tax, provided that a Defense City resident:

• reinvests tax-exempt profit into the development of its activities (e.g., upgrading material and technical facilities, improving technological and production processes, implementing advanced technologies, and other areas defined by law) by December 31 of the year following the relevant reporting year. Any unused amount of tax-exempt profit will be subject to taxation;
• does not accrue and pay dividends (or equivalent payments) to the owners of corporate rights, except for dividends payable to the state and entities wholly owned by the state;
• has no confirmed violations of tax obligations regarding the submission of reports, documents in the fields of transfer pricing and controlled foreign companies.

In addition, Defense City residents are exempt from paying:

• land tax and tax on immovable property other than land plot (applicable, inter alia, to land plots and real estate assets used in the business activities of Defense City residents);
• environmental tax.

It should be emphasized that all of the aforementioned tax benefits apply only if a Defense City resident does not simultaneously hold Diia City residency status.

Other benefits 

The Defense City regime is a comprehensive regulatory framework, and its scope extends beyond tax incentives.

Key non-tax benefits include simplified customs procedures for certain operations with goods, state support with relocation and protection of production facilities, streamlined export of military goods, restricted public access to sensitive information on Defense City residents and temporary non-disclosure of their financial reporting data, as well as certain foreign exchange relaxations enabling cross-border transfers based on a special National Bank of Ukraine permit.

The Defense City regime is a major initiative aimed at strengthening Ukraine’s defense industry during the period of martial law and beyond.

By offering a combination of significant tax and other benefits, it creates a favorable environment for defense enterprises to operate, modernize, and expand.

At the same time, companies considering Defense City residency should carefully assess the applicable eligibility criteria, compliance procedures, and ongoing obligations required to ensure full access to the available tax benefits and regulatory advantages.

Authors:

1. Viktoriia Bublichenko, Partner at GOLAW, Head of Tax, Restructuring, Claims and Recoveries practice, Attorney at law
2. Tetiana Fedorenko, Senior Associate at Tax, Restructuring, Claims and Recoveries practice at GOLAW, Attorney at law
3. Anna Kostsova, Junior Associate at Tax, Restructuring, Claims and Recoveries practice at GOLAW