Defence City: A New Impulse for Ukraine’s Defense-Industrial Complex

Ukraine has launched the special tax regime Defence City, designed to become a catalyst for the development of the Ukrainian defense-industrial complex (DIC). Launched at the end of 2025, this regime, similar to the successful Diia.City project, aims to simplify the tax burden, encourage the relocation of production facilities, and provide a range of benefits for companies operating in the DefTech (Defense Technologies) sector. Defence City is expected to help turn the defense industry into a high-tech, resilient, and competitive cluster capable of scaling up the production of weapons and military equipment.

The Reality of Defence City: Early Results and Prospects

Only half a year has passed since the launch of Defence City, and the state is already seeing the first results. As of July 21, 2026, the special regime has 45 residents. This indicates strong interest from the defense business in the conditions created by the state. Following the review of submitted applications, one applicant was denied resident status. As clarified by the Ministry of Defense, the main reasons for refusals are the applicant’s failure to meet the criteria established by law, failure to submit the required documents, or submission of incomplete or inaccurate information. Another important reason for refusal is the presence of statutory restrictions concerning the applicant, its ownership structure, control, or related parties. Special attention is paid to ties with the Russian Federation and the temporarily occupied territories, although such circumstances are considered in combination with other factors.

Fortunately, none of the 45 residents has lost their status so far. Grounds for revocation may include failure to meet the established criteria, submission of false information, the presence of legally prohibited restrictions, or other circumstances that make further residency impossible.

The total qualified income of the 45 residents, namely revenue from the sale of weapons, has already exceeded UAH 93.5 billion. This is a significant figure that demonstrates the sector’s potential and the effectiveness of the conditions created.

What Is Defence City: A Support Mechanism

Defence City is a special legal regime introduced by resolutions of the Cabinet of Ministers of Ukraine dated December 17, 2025. Its key goal is to facilitate the transformation of the defense sector, turning it into a powerful, high-tech, and competitive cluster. Companies recognized as strategically important for the state’s defense capability and meeting the criteria set out in Article 37 of the Law of Ukraine “On National Security of Ukraine” may become residents of Defence City.

The Path to Residency: Procedure and Requirements

The process of obtaining resident status in Defence City consists of several stages. It starts with an internal audit of the company to ensure compliance with the requirements of Article 37 of the Law “On National Security of Ukraine.” Next, an application must be submitted to the Ministry of Defense of Ukraine. The document package includes the application itself, stating the applicant’s details, types of activity, and information on defense contract performance for the previous year; an initial compliance report; annual financial statements with an auditor’s opinion; a certificate confirming the absence of tax debt; and, if necessary, a power of attorney for the representative. Documents may be submitted either electronically or in paper form.

After the documents are submitted, the Ministry of Defense conducts a review that lasts up to 10 business days. If all stages are successfully completed, an order granting resident status is issued, and the company is entered into the relevant Defence City register.

Each year, residents are required to report by submitting an updated compliance report, financial statements, and an auditor’s opinion. If signs of non-compliance or misuse of benefits are detected, the company may lose resident status.

Attractive Benefits for the Defense Business

Defence City offers its residents a wide range of benefits. The most important is exemption from corporate income tax (at the base rate of 18%) provided that the released funds are directed toward development — investing in new technologies, developing weapon prototypes, modernizing production, and more. It is important that these funds are used by the end of the calendar year. A key restriction is the prohibition on paying dividends from income that has been exempted from taxation, except for dividends paid to the state or state-owned enterprises.

In addition to corporate income tax, residents are exempt from land tax and environmental tax. However, the land tax rate is set by local councils and may reach 3%, while the amount of environmental tax depends on the types of pollution.

Among the additional practical advantages for Defence City residents are:

• Simplified customs procedures: importing components, equipment, and carrying out production operations becomes much easier.
• Expanded export opportunities: exports of military goods are possible without obtaining separate export authorizations.
• Currency liberalization: attracting international financing and using certain currency mechanisms becomes more accessible.
• Protection of sensitive information: public access to confidential information about a resident in state registers is restricted.
• Relocation support: financial assistance is provided, and production facilities become better protected under the coordination of the Ministry of Defense.
• Service support: residents receive consulting and service support from the Ministry of Defense.
• Mobilization deferment for liable employees: companies that are residents of Defence City are automatically considered critically important for the defense-industrial complex, which allows them to defer up to 100% of liable employees.

Industry Discussions and Expectations

The launch of Defence City was not without discussions and debate. Back in the summer of 2025, when the bills that formed the basis of this regime were at the parliamentary hearing stage, representatives of deftech companies voiced their views and expectations. One of the key issues was avoiding the creation of a “club for the chosen few” and ensuring that the mechanism is transparent for all real defense enterprises.

Industry representatives called for a clearer logic of residency, a separate register, a lower qualified income threshold, voluntary relocation, preservation of rules protecting sensitive information, and a more structured approach to supporting the defense-industrial complex. Importantly, the state is taking business feedback into account, because Defence City can become a powerful tool for Ukraine’s defense-industrial complex only if it is continuously improved as a living system rather than treated as a one-time reform.

Defence City vs. Diia.City: Complementary Mechanisms

At the beginning, Defence City was positioned as an analogue of Diia.City for the defense sector, but with a specific focus on military and dual-use technologies. The difference was that, under earlier versions of the bill, a Defence City resident could not simultaneously be a Diia.City resident, since the latter provided simplified tax systems.

However, for Ukrainian companies operating in the Defense Tech sphere, these two regimes are not competitors but rather complementary tools. Diia.City effectively supports the technology component, while Defence City focuses on production and defense aspects. This allows companies to gain maximum benefit from state incentives, covering the entire cycle from development to production and export.

The launch of Defence City is one of the most important state initiatives in recent years for Ukraine’s defense-industrial complex. This regime creates a favorable business environment that allows companies to plan development, increase investment in production, R&D, and the creation of new defense solutions, thereby strengthening the country’s defense capability.