Defence City in Ukraine

Defence City is a special legal regime for Ukrainian defence industry enterprises. Subject to the statutory conditions, residents may claim exemptions from corporate income tax, land tax, real estate tax and environmental tax. The rules also allow no-auction leasing of state and municipal property and support for relocating and protecting production facilities.

This article is intended for defence manufacturers, owners of Ukrainian defence industry enterprises, foreign investors and managers assessing Defence City status or planning to lease premises or relocate production.

1. The Defence City Legal Regime and Its Duration

2. Eligibility for Resident Status

3. Application and Registration

4. Tax Exemptions for Residents

5. Leasing State and Municipal Property Without Auction

6. Facility Protection and Production Relocation

7. Private Financing of Protected Production Infrastructure

8. Maintaining Status and the Consequences of Losing It

9. Participation by Foreign Companies

10. Defence City Checklist for Applicants and Residents

Frequently Asked Questions

How DLF Can Help

1. The Defence City Legal Regime and Its Duration

Defence City grants special status to an individual legal entity rather than establishing a separate geographical zone. Its statutory framework is set out in the Law of Ukraine “On National Security of Ukraine”. The Ministry of Defence of Ukraine decides on the grant, voluntary termination and loss of resident status.

The legal regime runs until 2036. A resident may leave earlier voluntarily or lose its status on statutory grounds. The tax exemptions also have limits linked to Ukraine’s accession to the EU.

2. Eligibility for Resident Status

The applicant must meet three basic requirements simultaneously.

• Ukrainian registration. Only a legal entity registered under Ukrainian law may apply. A company incorporated under foreign law cannot obtain the status directly.
• Corporate income tax payer status. The company must be a corporate income tax payer.
• Qualified-income share. Qualified income must account for at least 75% of total income in the previous calendar year. A 50% threshold applies to aircraft manufacturers covered by the statutory special rule.

Qualified income includes income from supplying own-produced defence goods and from developing, manufacturing, repairing, modernising or disposing of defence goods. It also includes cash charitable assistance used to manufacture and supply defence goods.

For a co-contractor or subcontractor, qualified income also includes income from materials, components and parts supplied to a Defence City resident for manufacturing its own defence goods under the relevant state defence contract. The state customer must confirm participation in that contract.

The law lists circumstances that preclude residency. These include prohibited links with an aggressor state, sanctions restrictions, unremedied breaches of beneficial-owner or ownership-structure disclosure requirements, bankruptcy and dissolution. Combined tax and unified social contribution arrears exceeding 10 statutory minimum wages also bar residency. Another exclusion concerns a registered location or operations in temporarily occupied territory.

3. Application and Registration

Applications are submitted to the Ministry of Defence under the prescribed procedure. The application and attachments must be in Ukrainian and signed by authorised persons; electronic submissions require an electronic signature.

The application contains information about the company, relevant officers, activities and compliance with the statutory requirements. Attachments include the previous year’s compliance report, annual financial statements, an auditor’s verification report on the compliance report, and the prescribed certificate of no outstanding tax and contribution payments or an extract of the relevant account balances. If a representative submits the application, a power of attorney or a duly certified copy must also be provided.

The application review period is 10 working days from receipt. The Ministry may return an application without consideration for formal defects within 5 working days; otherwise, it is deemed accepted for review.

Resident status is acquired through the Ministry’s decision and the corresponding entry in the Defence City Register. A register extract confirms the status.

Information in the Defence City Register itself is restricted official information. During martial law and for one year after its termination or cancellation, a resident may request restrictions on general access to its data in other public electronic registers, except the Diia City Register. Restrictions apply for the period of residency within that statutory framework; competent authorities and other persons specified by law retain access.

4. Tax Exemptions for Residents

The Tax Code of Ukraine provides four principal exemptions. They apply until 1 January 2036, but no later than the year Ukraine joins the EU, subject to the conditions of each exemption.

The corporate income tax exemption requires a separate application to the tax authority under the prescribed procedure; an application may be submitted only once during residency. If the tax authority does not issue a refusal within 10 working days of receipt, the application is deemed accepted.

While using the exemption, a resident must not accrue or pay dividends, except for payments to the state budget or state owners in the cases expressly specified by the Code. There must also be no established breaches of reporting and document-submission duties relating to transfer pricing and controlled foreign companies.

Exempt profit must be used for permitted purposes by 31 December of the following calendar year. These include creating and modernising fixed assets, new technologies, research and development of new weapons, and acquiring stakes in defence industry enterprises. In the latter case, the company whose equity is acquired must not accrue or pay dividends while the resident uses the exemption.

If profit is not used on time, tax is charged on the unused portion for the period in which the use deadline expires. Transfer-pricing adjustments and adjusted profits of controlled foreign companies are taxed under the general rules in the cases specified by the Code.

The State Tax Service’s official guidance confirms that Defence City and Diia City status may coexist. However, residents that also hold Diia City status cannot use any of the four Defence City tax exemptions. A company holding both statuses also cannot apply Diia City’s preferential personal income tax and unified social contribution rules for its employees and gig specialists.

5. Leasing State and Municipal Property Without Auction

Under the updated leasing rules, no-auction leasing of state or municipal property during martial law requires compliance with at least one of four alternative criteria.

1. The Ministry of Defence has designated the enterprise as critically important for the economy during the special period in the defence industry sector, or for meeting the needs of the Armed Forces and other military formations.
2. The enterprise is included in the electronic register of participants in selection procedures and contractors under state defence contracts.
3. The enterprise serially manufactures missile systems, develops new, modernised or modified missile weapons, or manufactures military explosives, unmanned systems, or active countermeasures (electronic warfare) or passive countermeasures against technical reconnaissance.
4. The enterprise holds Defence City resident status.

The September 2026 amendments added Defence City status as an independent ground and extended the mechanism to municipal property. The other three criteria no longer have to be met cumulatively.

Monthly rent for state property is 8% of its independently appraised value excluding VAT, divided by 12. For municipal property, this formula is a recommendation; the relevant local self-government body’s decision applies.

The prospective lessee submits a written application to the lessor to include the property in the Type II List, with information confirming the relevant criterion. The lessor forwards it to the entity managing the property and the Ministry of Defence within 3 working days. The Ministry confirms eligibility or gives notice of non-compliance within 5 working days of receipt.

The property-managing entity’s decision to lease must be agreed with the authorised governing body within a seven-day period. The lease is signed within 3 working days after the lessor receives the valuation report and its review. Information about the property, the lease, amendments and the handover document is not published in the electronic trading system.

No later than one year after the previous Ministry of Defence decision, the lessee must provide the lessor with a copy of a new decision confirming at least one criterion. The lease ends early at the lessor’s request if the lessee fails to provide this confirmation or no longer meets any of the four criteria.

6. Facility Protection and Production Relocation

The procedure for supporting relocation and protection of production facilities took effect on 1 January 2026. It applies to Defence City residents during martial law and for three years after its termination or cancellation, but no longer than the legal regime itself.

Relocation entails a change of registered location and the transfer of operations or production facilities to another location in Ukraine. Protection measures cover new construction, reconstruction or major repairs meeting shelter requirements. The two mechanisms generally cannot be combined, except when relocating separate units that do not use premises covered by the protection measures.

Enterprise relocation requires at least 30 employees and at least one preceding reporting year of defence-goods production. A separate unit must have at least 20 employees, the required production history and personal income tax agent status. On a reasoned request, the Ministry may waive the production-history and headcount requirements for the unit itself.

For protective measures, the resident must have at least 30 employees on the date of its application to the Ministry of Defence. These measures must be carried out at the resident’s principal place of tax registration.

Measures are financed from local budgets within the available budget appropriations. Funding does not cover the acquisition of real estate or land into private ownership or expenses outside the prescribed list.

Under the budget rule for 2026, the relevant community’s special fund receives 50% of the portion of personal income tax remitted by the resident as tax agent that belongs to the community budget’s general fund, subject to the statutory exception. This applies to residents that have submitted a relocation or facility-protection application; the funds support the corresponding infrastructure and measures.

7. Private Financing of Protected Production Infrastructure

In October 2026, the Ministry of Defence announced government-approved amendments to the Cabinet of Ministers resolution on the experimental construction mechanism for defence industry enterprises. According to the announcement, private developers will be able to build protected facilities using their own funds or external financing and, after construction is completed, transfer them to defence enterprises by way of ownership, lease or use.

The announced terms require any part of a facility transferred to a defence enterprise to comprise at least 25% of the total area and be suitable for establishing, relocating or expanding production. Construction timing, use and transfer terms are to be agreed by contract.

The same announcement states that participation requires an agreement with, among others, a Defence City resident, a state contractor or an enterprise designated by the Ministry as critically important in the defence industry sector.

8. Maintaining Status and the Consequences of Losing It

A resident must file its compliance report no later than 1 June of the year following the reporting year. It must attach annual financial statements and an auditor’s verification report on the compliance report. The auditor must be eligible to conduct statutory audits of public-interest entities’ financial statements.

Missing mandatory financial statements or a compliant auditor’s report is treated as failure to file the compliance report. The procedure also provides for return of reports filed late or in breach of form or signature requirements; a returned report is treated as not filed. A delay exceeding 20 working days, or a second consecutive breach of the filing deadline, is a separate ground for loss of status.

Status may be lost, among other reasons, for failure to meet the statutory requirements, inaccurate information or misuse of exempt profit. The compliance-report procedure allows 15 working days to explain discrepancies identified in a report; a separate statutory notice concerning signs of grounds for loss of status carries a 5-working-day response period.

Following loss of status, corporate income tax returns must be amended within 30 calendar days, with tax and late-payment interest assessed and paid under the statutory rules. Reassessment reaches back to the beginning of the reporting period in which the non-compliance that caused the loss arose. The amendment deadline for land and real estate tax is before the 20th of the following month; for environmental tax it is 30 calendar days. The Tax Code’s limitation periods do not apply in these cases.

Voluntary termination has different consequences. Unless a statutory impediment applies, the Ministry decides within 5 working days of receiving the application. Corporate income tax for the relevant period is determined under the general rules, with additional tax on any unused exempt profit whose use deadline has not yet expired. The latter rule also applies to voluntary withdrawal from the tax exemption without ending resident status.

9. Participation by Foreign Companies

A company incorporated under foreign law cannot obtain the status directly. Foreign investors may participate through a Ukrainian company with foreign capital that independently meets every resident requirement and submits its own application.

The entire ownership structure, beneficial owners and control must be checked, together with sanctions and other statutory restrictions, including those concerning specified high-risk jurisdictions.

A Ukrainian company with foreign capital may use the exemptions and no-auction leasing on the same terms as other residents.

10. Defence City Checklist for Applicants and Residents

The checklist covers applying for resident status, claiming tax exemptions, leasing without an auction, relocating or protecting production facilities and annual reporting.

• Check Ukrainian incorporation, corporate income tax payer status and the qualified income share: at least 75%, or 50% for the aircraft manufacturers specified by law.
• Check the ownership structure, beneficial owners, sanctions, tax debt and unified social contribution arrears.
• Prepare the Ministry of Defence application, compliance report, annual financial statements, auditor’s report and other required documents.
• Following the Ministry of Defence’s decision, check that the entry has been made in the Defence City register and obtain an extract.
• Submit an application to the tax authority for the corporate income tax exemption and check the restrictions, including those linked to Diia City status.
• Plan to use exempt profit for permitted purposes by 31 December of the following calendar year.
• For no-auction leasing, demonstrate compliance with one of the four criteria and arrange annual confirmation of compliance.
• For relocation or protective measures, check the staffing requirements, approval procedure and availability of budget funding.
• Submit the annual compliance report with the financial statements and auditor’s report by 1 June of the year following the reporting year.

Frequently Asked Questions

Who Can Obtain Defence City Resident Status?

A Ukrainian legal entity that pays corporate income tax and has a qualified-income share of at least 75% for the previous year, or 50% for the aircraft manufacturers specified by law. None of the statutory disqualifying circumstances may apply. Resident status itself has no minimum headcount requirement.

Does the Corporate Income Tax Exemption Apply Automatically?

No. After obtaining resident status, a separate application to the tax authority is required. The exemption starts on the first day of the calendar quarter following submission of that application, subject to the statutory conditions.

Can Defence City and Diia City Status Coexist?

Yes. However, a company that is also a Diia City resident cannot claim any of the four Defence City tax exemptions.

How Long Does Defence City Last?

The legal regime runs until 1 January 2036. The tax exemptions have an additional limit: no later than the year Ukraine joins the EU. An individual resident’s status may end or be lost earlier.

Can a Foreign Company Obtain the Status Directly?

No, if it is incorporated under foreign law. A foreign investor may participate through a Ukrainian legal entity that meets all statutory requirements.

How DLF Can Help

DLF attorneys-at-law advise Ukrainian defence manufacturers and foreign investors on Defence City, corporate structuring and regulatory matters. The firm’s lawyers assess income and ownership compliance, prepare Ministry of Defence filings and advise on no-auction leasing, reporting and reinvestment of profit.

Iurii Dynys, Counsel, Attorney-at-law, DLF attorneys-at-law.

Contact: +380 44 384 24 54, [email protected].

This material provides general information as at 26 October 2026. Application of the rules described depends on the circumstances of each case and requires an individual legal assessment.