Ukraine: Approval of Defence City regime for arms manufacturers including tax and customs incentives

22 Sept 2025    2 minute read
Defence City Regime Arms Manufacturers Tax and Customs Incentives

In brief

On 21 August 2025, the Verkhovna Rada of Ukraine enacted two significant pieces of legislation — Law No. 13420 and Law No. 13421 — creating the legal foundation for the Defence City initiative. Law No. 13420 on Defence City framework and tax incentives received presidential assent on 3 September 2025.

The Defence City initiative establishes a distinct legal regime aimed at fostering the advancement and modernization of Ukraine’s defence-industrial sector. It provides various fiscal, regulatory and operational benefits to eligible enterprises.

Enterprises applying for resident status are required to demonstrate a strategic significance to national defence. The Ministry of Defence of Ukraine will establish and maintain a secure, confidential registry of approved entities. All information pertaining to registered enterprises will be safeguarded in accordance with national security protocols.

Contents

Who is eligible to be a Defence City resident? 

A Ukrainian company that earns 75% (50% for aircraft manufacturers) of its income from the sale or supply of own produced defence goods, or from the development, manufacture, repair, modernization or disposal of defence goods, works or services, as well as charitable assistance used for the production and supply of defence goods is eligible.

For subcontractors for government supplies, income from the sale of materials, components and subassemblies that were supplied (shipped) to a Defence City resident under a government contract is also included.
Controlling authority keeping the register Ministry of Defence of Ukraine
Defence City regime start date Approximately 3 October 2025*
Defence City regime duration Until 1 January 2036, but no later than the year of Ukraine’s accession to the European Union

 

Main advantages

Corporate income tax incentives  Full exemption of reinvested profits
Real estate and land tax incentives Full exemption from applicable taxes on real estate and land plots used in production
Environmental tax incentives Full exemption
Customs incentives Simplified customs framework including facilitated import, export and processing of defence-related goods and simplified export control
Currency regulations National Bank of Ukraine is authorized to introduce tailored rules for currency oversight and foreign exchange operations applicable to Defence City residents, including relaxed controls or priority processing for cross-border transactions
Relocation assistance Voluntary relocation support mechanism aimed at facilitating the transfer of strategically important enterprises to safer or more suitable locations within Ukraine with possible financial aid

 

Please note:

  • The Defence City regime is separate to, and may not be combined with, other preferential tax regimes, such as Diia City, simplified tax and other corporate income tax-exempt status, including charitable organization benefits.
  • Transfer pricing rules are applied to controlled transactions under the general terms unless services/goods can be supplied by a so-called exclusive supplier. Defence City residents are responsible for proving that a supplier holds “exclusive” status.
  • The value-added tax exemption for defence services and goods supplied to the Ukrainian army is applied under general rules, with limited adjustments.

Main concerns and potential disadvantages

  • Defence City residency requirements restrict the number of business entities involved in defence technologies and products that may be included.
  • Compared with the Diia City regime, the Defence City regime is less generous in terms of the tax and legal incentives offered.
  • A corporate income tax exemption offered only for the reinvested profits but not for the distributed profits (in the form of dividends) may be a discouraging factor for potential investors.
  • Separately, the Defence City regime does not offer research and development credits, liability exemptions and governmental support, which might have made the regime more attractive.

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Mariia Tashchi, Associate, has contributed to this legal update.

Contact Information
Hennadiy Voytsitskyi
Partner
Kyiv
Read my Bio
hennadiy.voytsitskyi@bakermckenzie.com

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