Defence City Legal Regime Has Entered into Force

As of 5 October 2025, Ukraine has implemented a special legal regime – Defence City. This is a new mechanism of state support aimed at developing the defence-industrial complex, advanced technologies, attracting investment, and supplying the defence forces with modern weapons and equipment.

Duration

The regime will be in effect from the moment the first resident is entered into the Defence City Register until 1 January 2036.

Defence City Residents

A resident may be a legal entity – corporate income taxpayer registered in Ukraine that:

• Has submitted an application to the Ministry of Defence of Ukraine;
• Meets the requirements regarding the share of qualified income from its own production and supply of defence goods, performance of works or provision of services in this area, as well as charitable aid directed toward defence production (at least 75% of total income, at least 50% for aircraft manufacturing enterprises);
• Has no disqualifying circumstances, including tax debt in the amount exceeding 10 minimum wages; non-profit organization status; violation of the requirements for disclosure of information on ultimate beneficial owners (UBO) / submission of the ownership structure; presence among the owners / UBO of the aggressor state, its legal entities, citizens or residents, or control by such residents; presence among the owners / UBO of residents or citizens of states that do not comply with AML requirements for combating the financing of terrorism or the financing of the proliferation of weapons of mass destruction; presence in sanctions lists or connection with persons belonging to such lists; owners / UBO are connected with the conduct of terrorist activities; bankrupts; legal entities in the process of liquidation; location / carrying out activities in a temporarily occupied territory; violation of obligations under a state contract (agreement) for defence procurement during the last 12 months.

Procedure for Obtaining Resident Status

Applicants must submit to the Ministry of Defence of Ukraine an application with a compliance report and other supporting documents.

The Ministry will review the application within 10 working days and make one of the following decisions:

• to grant resident status and include the applicant in the Register;
• to refuse to grant such status (if the applicant does not meet the requirements, has provided false information, or if less than 12 months have passed since the loss of Defence City residency);
• to return the application without consideration (if the document package is incomplete or improperly prepared, at the applicant’s request, or if information about the termination or bankruptcy of the legal entity is found).

The decision is sent to the applicant in electronic form and takes effect from the date of its adoption.

Resident Reporting

Residents must annually, by 1 June, submit to the Ministry of Defence a compliance report for the previous calendar year. The report must include information on compliance with the law’s requirements, the share of qualified income, and execution of contracts confirming the amount of qualified income. 

Mandatory attachments: annual financial statements and an auditor’s opinion on the compliance report. The absence of these documents is considered equivalent to failure to submit the report. The Cabinet of Ministers of Ukraine may determine additional documents that must be attached to the report.

Tax Incentives for Defence City Residents

Tax incentives are valid until 1 January 2036, but no later than the year of Ukraine’s EU accession.

Corporate Income Tax

Tax incentive: Conditional exemption from taxation of profits.

Conditions: 

• resident status in Defence City; 
• not a resident of Diia City; 
• prohibition on accrual and payment of dividends (except payments to the state budget or state-owned entities); 
• no violations of transfer pricing or CFC reporting; 
• submission of an application for exemption. 

Exempt profit must be reinvested in the defence industry, including: 

• creation or re-equipment of material and technical facilities;
• creation, acquisition, modernisation, restoration, repair, or re-equipment of fixed assets, including the construction of production and technological facilities;
• improvement of technological and production processes;
• implementation of advanced technologies;
• acquisition of intellectual property rights for the purpose of performance of a state defence procurement contract (agreement);
• expenses for research, production of new models of weapons and military equipment or their components;
• acquisition of shares in enterprises of the defence industry (provided that the issuer of the corporate rights does not accrue or pay dividends (or equivalent payments) to any of the owners of the shares during the period in which the Defence City resident applies the profit tax exemption).

The exempt profit must be used for a specified purposes by 31 December of the following year, otherwise it becomes taxable.

If resident status is lost or tax conditions are violated, profit may become taxable with penalties, without limitation periods.

Residents remain subject to transfer pricing rules and CFC taxation (18%) in the case of controlled transactions or foreign company (CFC) income adjustments.

Land Tax

Tax incentive: Exemption from land tax on plots used for production activities or temporarily unused during relocation (and not transferred to third parties). 

Conditions: Resident of Defence City and not a Diia City resident.

Real Estate Tax (excluding land)

Tax Incentive: Exemption for facilities in the relocation area used in residents’ activities or housing for employees; industrial/warehouse buildings unused during relocation and not transferred to others. 

Conditions: Resident of Defence City and not a Diia City resident.

Environmental Tax

Tax incentive: Exemption from environmental tax. 

Conditions: Resident of Defence City and not a Diia City resident.

Export-Import of Goods

Residents of Defence City may export military goods without special authorization from the Cabinet of Ministers of Ukraine. 

Simplified customs procedures are introduced for import, temporary import, or processing of goods by Defence City Residents. These customs incentives shall become effective as of 24 October 2025 and shall be in effect during martial law and one year after its termination.

Dual Residency in Defence City and Diia City

A legal entity may simultaneously be a resident of both Diia City and Defence City, but in that case, it enjoys only limited Defence City benefits. Such dual residents are not exempt from corporate income tax, land tax, real estate tax, and environmental tax, and cannot apply the 5% PIT rate for employees or gig-contract specialists under Diia City contracts.