Ukraine Moves to Establish ‘Defence City’: New Draft Law Introduces Special Tax and Legal Regime for Defence Industry Enterprises

On 25 June 2025, the Verkhovna Rada of Ukraine registered draft law №13420 on Amendments to the Tax Code of Ukraine and Other Laws of Ukraine Regarding Support for Defence Industry Enterprises, aimed at significantly strengthening the national defence-industrial complex through the introduction of a unique legal and tax regime for defence enterprises. The proposed law represents a strategic policy shift to support wartime production and promote post-war industrial recovery under the framework of the President’s Build with Ukraine programme.

Key Purpose

The draft law seeks to create a specialised legal environment for defence manufacturers — informally referred to as “Defence City” — offering enhanced state support, investment incentives, and streamlined regulatory procedures for enterprises essential to Ukraine’s military production capacity.

Core Provisions

• Registry of Defence Enterprises: A designated list (the “Defence Industry Enterprises Register”) will be maintained by the Ministry of Defence.
• Eligibility Criteria: Inclusion will be based on application and objective criteria – 90%+ of revenue from defence-related production, including weapons, ammunition, and military equipment.
• Confidential Status: Inclusion in the registry, as well as associated reporting, will be classified and protected by law to safeguard sensitive information.

Tax and Regulatory Benefits (Valid until 1 January 2036)

Companies on the register will benefit from significant legal and fiscal incentives:

• Corporate Income Tax: Full exemption, subject to reinvestment of profits and a dividend distribution ban (excluding state dividends).
• Property and Land Tax: Exemption from land tax and non-residential property tax.
• Environmental Tax: Full exemption.
• VAT and PIT Incentives: Continuation of existing VAT exemptions and PIT preferences for housing benefits in case of enterprise relocation.
• Accelerated Depreciation: Maintained for both new and used fixed assets.

Other Strategic Measures

• Export Facilitation: Simplified export licensing for military-use technologies, including manufacturing abroad via affiliated foreign entities (subject to intergovernmental MoD agreements).
• Customs and Currency Preferences: Legislative changes to ease customs procedures and allow the National Bank of Ukraine to establish special currency rules for registered defence enterprises.
• Criminal Procedure Safeguards: Enhanced protections in criminal proceedings to shield vital manufacturers from undue interference.
• Relocation Infrastructure Support: Local governments may use PIT revenues paid by registered companies to fund relocation infrastructure.
• New Export Licence Fee: Introduction of a targeted licence fee for the export of defence and dual-use goods to fund defence needs.

Draft law №13420 is currently under parliamentary review. It is part of a broader legislative package, including proposed amendments to the Tax, Budget, Customs, Criminal, and Procedural Codes, and several key regulatory statutes affecting export control, public information, and licensing.