Defence City, Explained: Ukraine's Regime for Defense Manufacturers

The name suggests an industrial park. It is not one. Defence City is a set of legal rules that attach to a company once the Ministry of Defence enters it in a register — closer in design to Ukraine’s Diia.City regime for the IT sector than to a special economic zone.

The rules sit in Section V-1 of the Law of Ukraine “On National Security of Ukraine”, inserted by Law No. 4577-IX of 21 August 2025, which also rewrote parts of the Tax Code and of the export-control law. The dates matter for anyone reading older commentary.

Eligibility turns on a single ratio. The share of qualified income in a company’s total income must be at least 75%, calculated from the financial statements for the annual reporting period preceding the application. One carve-out exists: the threshold is 50% for aircraft-industry entities covered by Article 2 of the Law on the Development of the Aircraft-Building Industry, which turns on holding the relevant licences and certificates for aviation technology and engines.

Passing the revenue test is necessary but not sufficient. The statute lists fourteen disqualifying circumstances, and the Ministry of Defence checks them at application and on every annual report. The substance groups into four blocks.

• Corporate form and standing. Registered abroad or under foreign law; not a corporate income tax payer; on the register of non-profit institutions; declared bankrupt or in insolvency proceedings; in the process of winding up other than a conversion.
• Fiscal and transparency hygiene. Tax debt or unpaid unified social contribution exceeding ten minimum wages in aggregate; breach of the beneficial-ownership or ownership-structure disclosure rules that has not been cured.
• Ownership and sanctions.Direct or indirect ownership by the aggressor state, its legal entities or its residents and citizens; participants or ultimate beneficial owners who are residents or citizens of that state, or of a jurisdiction on the FATF-related non-compliance lists; sanctions under Ukraine’s sanctions law or international sanctions on the company, its owners or a party related by control; owners listed as connected to terrorist activity; control, directly or indirectly, by residents of the aggressor state.
• Performance and location. A breach of obligations under a state defence procurement contract established in the last twelve months that led to early termination, fines or damages confirmed by a final court judgment, unless voluntarily remedied in full; a location on, or activity in, temporarily occupied territory.

A fifteenth exclusion sits in the Tax Code rather than in the list: the tax reliefs are available only to residents who are not simultaneously Diia.City residents. In practice a company chooses one regime.

Press coverage tends to compress the package into “tax exemptions.” The statutory reality is narrower in the tax lines and broader elsewhere.

The procedure is administrative and short by Ukrainian standards. The Ministry of Defence sets it out in four steps.

1. 1Internal audit. Test the company against Article 37 — the revenue ratio and the fourteen exclusions — and decide whether the status is worth pursuing.
2. 2Application to the Ministry of Defence.The application names the entity and its responsible officer, lists activities, states compliance with the qualified-income requirement and reports performance of state defence contracts for the previous year, including participation as subcontractor. Attached: a primary compliance report, annual financial statements with the auditor’s report, a certificate of no tax arrears, and a power of attorney where a representative files. Filing is electronic with a qualified signature, or on paper.
3. 3Review — 10 working days. The Ministry checks compliance, verifies the information and looks for grounds of refusal, applying the Cabinet-approved methodology for calculating qualified income. Incomplete filings are returned without consideration, with notice inside five working days.
4. 4Entry in the register. Status is granted by ministerial order and takes effect from the entry in the Defence City register; the company receives the order and an extract. The tax exemption is a separate step after that, on application to the tax authority.

Relocation support and register-visibility restrictions are separate applications to the same ministry, each decided on its own terms.

Residency is a continuing obligation rather than a certificate. Every resident must file a compliance report by 1 June for the previous calendar year, covering all Article 37 requirements, the qualified-income share achieved and the contracts that evidence it, with audited annual financial statements attached.

Voluntary exit exists and is decided within five working days, but an exit application filed after the Ministry has already issued a non-compliance notice is returned unexamined if the loss decision follows. The sequencing rewards companies that treat the annual report as an audit deliverable.

Half a year of operating data is now public, and it is the most useful signal about how selective the regime is in practice.

Two readings follow. The refusal count says the filter is doing its work at the application stage rather than after the fact, which is what an investor checking a target’s status wants to see. And 45 residents is a small fraction of the several hundred companies in Ukraine’s defense sector, so resident status is a signal about a company, not a description of the industry. The wider market numbers behind that gap are in Ukrainian defense-tech investment, by the numbers.

Because Defence City was designed with Diia.City as the template, companies with software teams routinely ask whether they can hold both. For the tax benefits the answer is no: each Defence City relief in the Tax Code excludes taxpayers who are simultaneously Diia.City residents.

The first disqualifier answers the most common question: a company registered abroad or under foreign law cannot be a resident. Defence City therefore never applies to a foreign parent. It applies, at most, to a Ukrainian legal entity inside a programme — a subsidiary, a joint venture company or a Ukrainian contract manufacturer.

• If you are localising production. The regime is an input to the structure decision, not a substitute for it. Whether the Ukrainian entity can clear a 75% defence-revenue ratio in its first full year, and whether the reinvestment condition fits your distribution plans, both belong in the model before the entity is formed. The structure choice itself is compared in JV or contract manufacturing in Ukraine.
• If you are buying from Ukraine.A supplier’s resident status tells you it passed a state check on ownership, sanctions exposure, tax standing and beneficial-ownership disclosure, and that its defence revenue is concentrated and audited. It says nothing about product qualification or delivery capacity, and it does not replace the export permit for your specific shipment — the mechanism for that is set out in how to procure Ukrainian defense-tech.
• If you are investing. Resident status changes the after-tax model of a Ukrainian target: profit reinvested in production is untaxed, but distributions out of that profit are barred while the exemption is used. It also introduces a compliance risk to diligence, since the clawback on loss of status reaches back to the period when non-compliance began.
• If you are choosing a route into the market at all. Localisation is one of several, and the regime should not decide it. The six routes are set against each other in the six ways into Ukraine’s defense market.