Advantages and risks of the legal regime of Defense City

Defence City - is a new special legal regime created in Ukraine to support defense industry enterprises. Its main goal is to provide the most favorable conditions for the development of the defense industry, attracting investment, introducing innovations and strengthening the country's defense capabilities. This regime is to be in effect until January 1, 2036 or until Ukraine joins the European Union.

The purpose of Defence City

The main task of the regime is to support for national production of weapons and military equipmentThe Ukrainian defense industry is also committed to stimulating technological development and strengthening the role of the Ukrainian defense industry in meeting the needs of the Armed Forces.
The law is also aimed at making the industry more attractive to investors and creating a competitive domestic market for defense technologies.

Basic principles of operation

The Defense City mode provides:

• tax benefits for resident companies;

• simplified customs procedures;

• special currency controladapted to the specifics of the defense industry;

• protection of confidential information about enterprises during martial law.

For the effective implementation of this regime, it is necessary to amend the following Tax, Customs, Budget, Criminal and Criminal Procedure Codesand to develop a number of bylaws that will specify the mechanisms of the law.

Who can become a resident of Defence City

The main tools for implementing the program are List of residents of Defence City - companies that meet the statutory requirements and can take advantage of the benefits.
This List may include:

• companies with at least 75% of revenue for the previous calendar year amounted to qualified income from defense contracts;

• Aircraft manufacturing enterprises, where the share of such income is not less than 50%.

Qualified income - is the profit from the development, production, repair, modernization or utilization of defense products. It may also include subcontractors' income confirmed by government customers.

At the same time, a prerequisite is no tax debts і relocation of the enterprise to safe areas.

Tax benefits for Defence City residents

Companies that obtain residency status will be entitled to a number of tax advantages, including:

• exemption from income tax (subject to reinvestment of profits in production or support of the Armed Forces);

• exemption from land tax;

• exemption from industrial real estate tax;

• exemption from environmental tax.

Customs simplifications include reducing the number of permits and simplifying export control procedures for military goods.

The key change is that Defence City residents can export weapons without additional permits from the State Export Control Servicewhich significantly accelerates international defense contracts.

Protection of information

During martial law information about Defence City residents is not subject to disclosure in public registers to minimize the risks of sabotage, cyberattacks or other threats to defense enterprises.

Advantages of the Defense City mode

1. Financial support for the industry - Thanks to tax exemptions, companies can allocate more resources to development.

2. Accelerate export operations - simplified customs control allows for faster delivery of defense products.

3. Investment attractiveness - clear and stable conditions encourage foreign investors to participate.

4. Innovative development - The benefits encourage the creation of new technologies and in-house production solutions.

5. Business protection - data privacy ensures the security of enterprises during the war.

Key risks and challenges

1. Strict requirements for defense revenues. For many companies, reaching the level of 75% in defense contract revenues may not be realistic.

2. Mandatory reinvestment of profits. If a company does not direct its profits to development, the tax benefit is lost.

3. The possibility of losing status. Failure to comply with the requirements or errors in reporting may result in delisting.

4. Dependence on bylaws. Without clear procedures of the Cabinet of Ministers, the implementation of the regime may be delayed.

5. Balance between confidentiality and transparency. Hiding data can raise questions from international partners and regulatory authorities.

6. Legal conflicts. It is necessary to harmonize with international law, in particular with EU rules on state aid and export controls.

Combining Defense City with other modes

A legal entity can be a resident at the same time Defence City і Diia CityHowever, in such a case, it loses the right to some tax benefits, including exemption from income tax and real estate tax.
In addition, employees of such companies will pay personal income tax at the general rate of 18%and not 5%, as for ordinary Diia City residents.

Conclusion.

Legal regime Defence City is an important step towards modernizing Ukraine's defense industry. It creates a favorable environment for investors and stimulates the development of technologies, but requires a balanced approach to the selection of participants, clear regulation of procedures and transparent control.

To take advantage of Defence City and avoid risks, businesses should prepare financial statements in advance, confirm the structure of income and consult with lawyerswho specialize in tax and defense law.