Ukraine Launches “Defence City” Special Regime: New Opportunities for Defence Industry

At the end of 2025, the Cabinet of Ministers of Ukraine and the National Bank of Ukraine (NBU) adopted the necessary secondary legislation to launch the special tax and legal regime "Defence City” for companies of the military-industrial complex (MIC). Already in early January 2026, the Ministry of Defence of Ukraine granted "Defence City” resident status to the first company, one of the major Ukrainian manufacturers of unmanned aerial vehicles.

In our previous publication, "Ukraine launches incentive regime "Defence City” for defence industry companies”, we analysed the criteria for obtaining resident status, as well as the key benefits and prospects of this regime.

In this material, we focus on the procedure for acquiring "Defence City” resident status, reporting and control issues, the specifics of tax and currency incentives, and new mechanisms for business protection.

To obtain resident status, a company must submit an application to the Ministry of Defence in paper or electronic form (using a qualified electronic signature). A package of documents is attached to the application, including the ownership structure, a certificate confirming the absence of tax debt, and a report on the applicant’s compliance with "Defence City” requirements.

The most comprehensive step in the procedure is preparing the compliance report. During the preparation of this report, the applicant must calculate the share of "qualified income” (income from the production of defence goods or relevant services) in accordance with the methodology approved by the Cabinet of Ministers. As a general rule, the share of qualified income must constitute at least 75% of total income for the previous reporting year (for companies in the aircraft manufacturing industry, this threshold is 50%).

Qualified income includes:

The relevant share of qualified income must be confirmed by a certified auditor. Such an auditor must provide a report on the verification results, which, together with the full annual financial statements, is attached to the package of documents submitted to the Ministry of Defence.

The Ministry of Defence reviews the application and makes a decision on granting the status (or refusal) within 10 working days. In the event of a positive decision, a record of the resident is entered into the "Defence City” register.

"Defence City” resident status implies an obligation for residents to annually confirm their compliance with the established criteria. A "Defence City” resident is obliged to submit a compliance report for the previous year to the Ministry of Defence no later than 1 June of each year. The rules for compiling such a report are analogous to those for the initial report for acquiring resident status.

"Defence City” residents are required to report to the Ministry of Defence. Still, they are exempt from the obligation to publish annual financial statements, consolidated financial statements, and relevant audit reports (if applicable) during the period of martial law. Legislation provides for a deferral of this obligation: companies must publish the specified reporting in full only within three months after the termination of martial law (or within 30 days after the loss of "Defence City” resident status). It is also important that the state guarantees data confidentiality: statistical bodies do not publish the financial statements of "Defence City” residents, and in consolidated statistical data, information is presented in a way that prevents the identification of MIC enterprises.

In addition to annual reporting, a "Defence City” resident must be prepared for regular control by the Ministry of Defence (based on information received from the tax authority or from the resident themselves). In case of discrepancies or signs of non-compliance (in particular regarding the misuse of profits), the Ministry of Defence will send a request for explanations to the resident. Failure to provide explanations or failure to remedy violations constitutes grounds for the deprivation of "Defence City” resident status.

One of the key advantages of the regime is the corporate income tax exemption (subject to its reinvestment in development). To enjoy such benefits, a "Defence City” resident must direct the tax-exempt profit to permitted purposes, such as technology development, equipment modernisation, or the development of new types of weaponry.

It is important to note that using tax benefits is optional. A "Defence City” resident has the right to choose whether to use the benefit in a specific tax (reporting) period. If a resident plans to cease using tax benefits, they must submit an application waiving the corporate income tax exemption without terminating their "Defence City” resident status.

In recent months, the NBU has actively worked to create favourable conditions for "Defence City” residents. In particular, a mechanism has been introduced to obtain individual permits for conducting currency operations necessary for the execution of international interagency agreements or for investing abroad (M&A, establishment of joint ventures (JV), or subsidiaries abroad). Such transactions become possible based on a separate decision of the NBU, adopted upon a special petition by the Ministry of Defence in the interests of the "Defence City” resident.

A separate important step for "Defence City” residents is the simplification of conditions for purchasing foreign currency. The NBU has permitted targeted financing funds (grants, credits, or loans from foreign states and international organisations) to be excluded from the calculation of balances on client bank accounts. This means that the presence of foreign currency raised for defence projects is no longer an obstacle to entering the interbank market for purchasing foreign currency. Residents can freely purchase the necessary currency to pay for the import of equipment, components, and materials without spending reserved project funds.

A "Defence City” resident intending to relocate a legal entity (its separate units) or implement measures to enhance the protection of production facilities (e.g., construction of protective structures) may apply to the Ministry of Defence for state support. According to the mechanism approved by the Cabinet of Ministers, the Ministry of Defence will act as the coordinator of the relocation process or protection enhancement measures, with the assistance of regional military administrations and local self-government bodies.

Funding for relevant measures may be partially provided from local budget funds within available resources. For example, a "Defence City” resident may be reimbursed for actual costs for the transportation of production assets and personnel (provided that the services of JSC "Ukrainian Railways” or JSC "Ukrposhta” are used), as well as expenses for the lease of state or communal property for a term of up to five years.

At the same time, it should be taken into account that access to such state support is available only to companies that meet established requirements regarding the duration of activities in the production of defence goods and the minimum number of employees. Furthermore, a resident engaged in relocation cannot simultaneously implement measures to enhance protection.

An additional option for increasing security is the ability to restrict access to information about the "Defence City” resident in public electronic registers. A resident has the right to apply to the Ministry of Defence to limit the display of information about them (e.g., location of real estate or data on beneficiaries) in state registers to mitigate the risks of intelligence activities by the aggressor state.

The launch of the "Defence City” legal regime creates new opportunities for the Ukrainian MIC. The combination of tax incentives, the easing of currency restrictions, and the introduction of business protection mechanisms is designed to stimulate industry development. However, businesses should take compliance and reporting procedures responsibly, as the state retains control levers over the targeted use of the granted preferences.