Law on special legal regime for defence industry enterprises “Defence City” has been adopted
On 21 August 2025, the Parliament of Ukraine adopted a package of draft laws introducing a special legal regime for defence industry enterprises, known as Defence City.
In order to benefit from the tax and customs incentives under this regime, a defence industry enterprise must first obtain Defence City resident status.
These legislative changes are part of a broader governmental strategy to develop Ukraine’s defence-industrial complex, aimed at accelerating the creation and implementation of advanced military technologies, ensuring inflows of private and foreign investment, and strengthening national defence capabilities by systematically equipping the Armed Forces of Ukraine and other security and law enforcement agencies with modern weapons.
Legislative Framework
The Defence City regime has been established through the adoption of two fundamental laws:
- Draft Law No.13420 of June 25, 2025, “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine Regarding Support for Defence Industry Enterprises”
- Draft Law No.13421 of June 25, 2025, “On Amendments to Section XXI ‘Final and Transitional Provisions’ of the Customs Code of Ukraine Regarding Support for Defence Industry Enterprises”
The detailed procedures for the operation of Defence City residents are expected to be further regulated in a new section to be added to the Law of Ukraine “On National Security of Ukraine.”
Key Provisions
1) Establishment of Defence City and Resident Status
The new regime defines the category of Defence City resident and sets out the procedure for obtaining such status, the requirements to be met by residents, and the grounds for refusal or revocation.
To acquire Defence City resident status, a legal entity must submit an application to the Ministry of Defence of Ukraine. The application procedure will be determined by a forthcoming resolution of the Cabinet of Ministers of Ukraine. Status is granted only if the applicant meets the statutory requirements, including:
- Income criteria for the preceding calendar year:
- at least 75% of total income (general rule)
- at least 50% for aircraft manufacturers, as provided by the Law of Ukraine “On the Development of the Aircraft Industry.”
“Qualified income” includes income from the sale of domestically produced defence goods, performance of defence-related works, or provision of defence-related services (development, manufacturing, repair, modernization, disposal)
“Defence goods” encompass weapons, military and special equipment (including unmanned systems, electronic warfare and reconnaissance equipment, and counterintelligence countermeasures), and ammunition
- Absence of disqualifying circumstances, including:
- registration under the laws of a foreign state
- failure to pay income tax or existence of significant tax debt/arrears of social security contributions (exceeding 10 minimum wages)
- inclusion in the Register of Non-Profit Institutions and Organizations
- violation of legal requirements regarding disclosure of information about ultimate beneficial owners and/or submission of information about the ownership structure of a legal entity, and failure to remedy this violation
- association with aggressor states, sanctioned persons, or non-compliant offshore jurisdictions
- pending bankruptcy or liquidation
- material violations of state defence contracts within the preceding 12 months
- registration or operation in temporarily occupied territories
Residents must comply with these requirements throughout their residency. Breaches may lead to revocation of resident status by the Ministry of Defence.
Applications must be reviewed within 10 business days, with decisions rendered to grant or deny status. The form, submission process, and calculation methodology for qualified income will be established by the Cabinet of Ministers.
2) Tax Incentives
Residents of Defence City may apply for a special tax regime under which they are exempt from corporate income tax until 1 January 2036, or until the date of Ukraine’s accession to the European Union (whichever comes first).
Such an application may be submitted only once during the period of validity of this status. An application for exemption from income tax must be submitted by the taxpayer in any form to the controlling authority at the place of registration through the taxpayer's electronic cabinet.
Exemption applies only if the resident:
- maintains Defence City resident status
- is not simultaneously a Diia City resident
- does not pay dividends (except to state-owned enterprises)
- has no violations in transfer pricing or controlled foreign company reporting (Articles 39 and 392 of the Tax Code of Ukraine)
Exempted profits must be reinvested in defence-related activities, such as:
- creation or modernisation of production facilities and fixed assets
- improvement of production processes and adoption of new technologies
- acquisition of intellectual property rights under state defence contracts
- R&D and manufacture of new weapons or equipment
- acquisition of corporate rights in defence-industrial enterprises
Voluntary waiver of the exemption is permitted only after the year following the first year of its application.
In the event of termination or loss of Defence City resident status, the taxpayer shall determine its corporate income tax liabilities in the ordinary manner for the reporting period in which the relevant application was submitted or the violation occurred. If, as of the date of submission of the application, there remains any portion of unused exempted profit, such portion shall also be subject to calculation and payment of income tax.
Upon the loss of resident status or violation of the applicable requirements, a Defence City resident immediately forfeits the right to the exemption, effective from the first day of the month of the reporting period in which the violation or non-compliance took place. In such cases, the resident is required to submit a revised tax return, calculate the corresponding tax liabilities, and pay both the tax and applicable penalties within 30 calendar days (or no later than the day following the violation). The tax and penalties shall be calculated from the beginning of the reporting period in which the violation or non-compliance occurred. Importantly, the limitation periods set forth in Article 102 of the Tax Code of Ukraine shall not apply in this situation.
Furthermore, residents of Defence City (excluding taxpayers who also simultaneously hold Diia City resident status) are exempt from paying land tax, environmental tax, and real estate tax. This exemption does not require the submission of a separate application, as it applies automatically from the moment of acquiring Defence City resident status.
3) Confidentiality of Information
During martial law, the financial reporting data of Defence City residents shall not be publicly disclosed.
The Cabinet of Ministers must adopt procedures within one month to restrict public access to information in electronic registers concerning Defence City residents.
Amendments to the Law “On Public Electronic Registers” provide that, for the duration of martial law and one year thereafter, general access to such information is restricted. Registers affected include:
- Unified State Register of Legal Entities, Individual Entrepreneurs, and Public Organisations
- State Register of Rights to Immovable Property
- State Land Cadastre
- Unified State Register of Enterprises and Organizations of Ukraine
- State Register of Industrial Designs
- State Register of Trademarks
- and other registers specified by the Cabinet of Ministers
In addition, Defence City residents that are legally required to publish annual and consolidated financial statements, along with audit reports, management reports, consolidated management reports, reports on payments to the state, and consolidated reports on such payments, must ensure full publication of all such documents within three months after the termination or cancellation of martial law (state of war). This obligation applies to the entire period during which such reports were not published.
At the same time, if a Defence City resident loses or terminates its resident status earlier, the reports must be published no later than 30 days from the date of such loss or termination.
4) Simplified Export Controls
Defence City residents that develop or manufacture military goods may export such goods without Cabinet-level authorizations normally required under Article 13 of the Law of Ukraine “On State Control of International Transfers of Military Goods and Dual-Use Goods.”
5) Expanded Powers of the Ministry of Defence
The Ministry of Defence is authorised to obtain information from the State Tax Service and State Customs Service regarding compliance of residents. Regulators must also notify the Ministry of any misuse of tax-exempt profits or violations by Defence City residents.
6) Interaction with Diia City
Although current legislation does not expressly prohibit dual residency, simultaneous Defence City and Diia City status prevents the application of preferential tax benefits.
Personal Income Tax (PIT): Diia City’s preferential 5% PIT rate does not apply if the taxpayer also has Defence City status; instead, income is taxed at the general 18% rate.
Single Social Contribution (SSC): Diia City’s reduced SSC benefit (minimum contribution level for employees and gig-contractors) also does not apply in cases of dual residency.
7) Currency Regulation
Draft Law No. 13420 instructs the National Bank of Ukraine to establish, within two months, special rules for currency transactions and currency supervision applicable to Defence City residents. Thus, additional privileges in this area are expected.
8) Customs Procedures
Certain customs procedures are expected to be simplified, including exemptions from document submission requirements and streamlined conformity assessments.
The laws will enter into force one month after publication, provided they are signed by the President of Ukraine.
For further information, please contact Asters' Partner Yuna Potomkina or Counsel Anton Sintsov.
