Defence City: New Opportunities for the Military & Defence Industry

The President of Ukraine has signed draft law No. 13420 (Law on Amendments to the Tax Code No. 4577-IX) and draft law No. 13421 (Law on Amendments to the Customs Code No. 4578-IX). Law No. 4577-IX will enter into force on 5 October 2025, and Law No. 4578-IX on 24 October 2025. 

The new legislation introduces a special legal regime—Defence City—to support companies in the military and defence industry sector. Its aim is to stimulate military production in Ukraine and attract investment in innovative technologies. 

Below is an overview of the key changes introduced by these laws.  

Requirements for Defence City residents 

Law No. 4577-IX provides for the creation of a separate Defence City Register. Obtaining Defence City resident status is voluntary; however, the law establishes two key requirements for applicants:  

1. Qualified income  

a) At least 75% of total income must come from activities in the military and defence sector (production and sale of military goods, works, and services). 

b) For companies in the aircraft manufacturing sector, the threshold is 50%. 

This requirement applies both for the year preceding the application and throughout the entire period of residency  

2. Absence of “negative criteria”   

Restrictions apply to potential or current Defence City residents, including: no tax debt (exceeding 10 minimum wages), no participants from the aggressor state or its residents, no bankruptcy proceedings, etc. Industry-specific restrictions also apply. For example, no breaches of defence contracts in the past year that resulted in termination or sanctions confirmed by a court (except where the decision was voluntarily complied with).  

Advantages of Defence City residency 

1. Tax benefits 

Residents of Defence City are temporarily exempt from certain taxes until 1 January 2036, but no later than the year Ukraine joins the EU:  

1) Income tax – exemption applies if the following conditions are met simultaneously:  

a) The company does not accrue or pay dividends to shareholders, except for dividends to the state budget or in favour of state-owned companies. 

b) The company complies with all tax reporting obligations, including transfer pricing and controlled foreign company reporting.  

Tax-exempt income may only be used for purposes specified by law, in particular the development and creation of innovative defence technologies. If, by 31 December of the year following the reporting year, such profits (or part thereof) are not used for their intended purpose, the enterprise must calculate and pay income tax on the unused funds.  

Taxpayers applying this exemption are not permitted to apply only the annual tax (reporting) period.  

2) Land tax – exemption applies to land plots where production facilities are located or which are temporarily unused but not transferred to third parties. 

3) Tax on immovable property other than land plots – exemption applies to facilities that are not leased, rented, or loaned (except to employees) and are used in economic activities and/or employee accommodation.  

4) Environmental tax. 

Important: Companies that are already residents of Diia City cannot benefit from these tax exemptions.  

2. Simplification of customs procedures  

Defence City residents can take advantage of special conditions when completing customs formalities for military and dual-use goods and technologies: 

1) Simplified customs procedures when placing goods under customs regimes for import (in terms of the end-use procedure), temporary import, or processing within or outside Ukraine, including: 

a) Residents are exempt from the obligation to provide information about the location and movement of goods within Ukraine, as well as the location of accounting, commercial, and transport documentation when submitting documents for obtaining authorization. 

b) No time limits apply to goods and operations placed by Defence City residents under certain customs procedures (e.g., temporary import). 

c) Compliance assessments for obtaining authorization are carried out at customs officials’ workplaces, without the need for on-site visits to the enterprise’s facilities. 

2) Simplified export control – Defence City residents are exempt from the obligation to obtain authorization from the State Export Control Service to export military goods.

3. Restricted access to registers 

1) Information about Defence City resident companies in the Unified State Register, the Register of Legal Entities and Individual Entrepreneurs, and the State Register of Companies will be available only to authorized bodies (such as the State Tax Service, the State Customs Service, the State Treasury, the Ministry of Justice, the Prosecutor General’s Office, etc.). 

2) Resident enterprises are not required to publish annual and consolidated financial statements until the end of martial law (with an additional three-month deferral). This reduces the administrative burden and ensures confidentiality. 

Defence City vs Diia City  

Law No. 4577-IX stipulates that a company that is simultaneously a resident of Defence City and Diia City cannot benefit from Defence City tax exemptions. In our view, this restriction may limit opportunities for existing Diia City residents. 

The Deloitte team believes that, despite certain shortcomings in the new legislation, the changes introduced may contribute to the development of the defence industry and strengthen Ukraine’s defence capabilities. However, they do not provide a comprehensive solution for taxation in the sector. We will continue to monitor further developments and keep you informed of the latest updates. 

_{The above review is provided by Deloitte experts for information purposes only and should not be used as official advice without an in-depth expert analysis.}

_{Stay tuned for our upcoming tax and legal alerts — in the next series, we will review recent changes to concession legislation.}

Return to the previous page: Tax & Legal Alerts 2025