Defence City is Ukraine's special legal and tax regime for defence manufacturers, in effect until 1 January 2036 (Law No. 4577-IX of 21 August 2025, in force since 5 October 2025). A resident can exempt from corporate income tax the profit it reinvests in production and does not distribute as dividends. It also stops paying land tax and real estate tax on qualifying property, as well as environmental tax (para. 76, subsection 10, Section XX of the Tax Code of Ukraine). Every benefit depends on accounting: the share of qualifying income, the use of exempt profit and an annual compliance report.
Key points
- Who qualifies: Ukrainian legal entities paying corporate income tax, with at least 75% of total income from qualifying defence goods, works and services (Article 37 of the Law on National Security of Ukraine).
- Corporate income tax: exemption on condition that profit is reinvested and no dividends are paid.
- Other taxes: land tax, real estate tax on qualifying property and environmental tax.
Legal framework
Residency rules sit in Section V-1 of the Law on National Security of Ukraine, tax incentives in para. 76, subsection 10, Section XX of the Tax Code, procedures in Cabinet Resolution No. 1745 of 17 December 2025, and customs rules in Law No. 4578-IX.
Who can become a resident
Only a legal entity can be a resident. Status arises when the Ministry of Defence decides to grant it and records the company in the Defence City register (Article 37, parts 1 and 3). The regime runs from the first entry in the register until 1 January 2036 (Article 36, part 3); the Tax Code also caps the tax incentives at the year Ukraine joins the EU, if that comes earlier.
The key test is the share of qualifying income: at least 75% of total income, or 50% for aircraft manufacturers (Article 37, part 6). An applicant calculates it from the previous year's financial statements. Qualifying income covers own-produced defence goods (including drones and electronic warfare systems), work on developing, repairing or upgrading them, charitable cash used for their production and, for subcontractors on state defence contracts, components supplied to a resident.
Part 7 of Article 37 lists 14 disqualifying circumstances. Two matter most for finance teams: the company must pay corporate income tax, and its combined tax and social contribution debt may not exceed 10 minimum monthly wages as of 1 January (UAH 86,470 in 2026, with the minimum wage at UAH 8,647). Sole proprietors and single-tax companies therefore cannot qualify.
The application, with a compliance report and a tax clearance certificate, goes to the Ministry of Defence, which decides within 10 working days (Article 38, part 4).
Corporate income tax exemption and reinvestment
The exemption requires a separate application to the tax office, which can be filed once during the residency. It applies from the first day of the quarter following the application; if the tax office does not refuse within 10 working days, the application is deemed accepted (subpara. 76.1 of the Tax Code). The following conditions must be met at the same time:
- the company holds Defence City status;
- it is not a Diia City resident;
- it does not accrue or pay dividends, except to the state budget or fully state-owned shareholders;
- it has no established breaches of transfer pricing or CFC reporting (Articles 39 and 39-2 of the Tax Code).
Exempt profit must be invested by 31 December of the following year in production assets, new technologies, defence-related IP, research and new weapons, or shares in defence companies that pay no dividends. Any other use is misuse, and the unused part is taxed under general rules. Transfer pricing adjustments and CFC profits stay taxable at the standard rate.
Returns are filed quarterly on a cumulative basis. A resident may opt out no earlier than after the end of the calendar year following the start of the exemption, applying at least 15 calendar days before the new year.
Incentives at a glance
| Tax | What is exempt | From when |
|---|---|---|
| Corporate income tax (subpara. 76.1) | Profit reinvested by 31 December of the following year | First day of the quarter after the application |
| Land tax (subpara. 76.2) | Plots under the resident's production facilities; plots idle during relocation and not transferred to third parties | Month after status is granted |
| Real estate tax (subpara. 76.3) | Property in the relocation town used by the resident or for staff housing and not leased out; industrial and warehouse buildings idle during relocation | Month after status is granted |
| Environmental tax (subpara. 76.4) | The full tax | Next reporting period after status is granted |
These exemptions do not apply to companies that are also Diia City residents, which in turn lose Diia City's 5% personal income tax rate and minimum social contribution. Our article on Diia City resident accounting and taxes explains that regime.
Customs simplifications
During martial law and for a year after, residents get authorisations for end-use import, temporary admission and processing based on the customs declaration, assessed without a site visit (para. 9-51, Section XXI of the Customs Code). Duty and import VAT rates stay the same.
Accounting and reporting
- Income analytics separating qualifying income by contract, with evidence of own production.
- A register of exempt profit for each year: amount, deadline, purpose, contract and payment. Profit counts as used once paid or prepaid under a qualifying contract (Resolution No. 1745).
- Control over any distribution that could count as a dividend.
- Timely transfer pricing and CFC reporting.
The compliance report is due to the Ministry of Defence by 1 June each year for the previous year (Article 41, part 3). It must include the annual financial statements and a report from an audit firm entitled to perform statutory audits of public-interest entities; without either, the report counts as not filed. Residents may defer publishing financial statements until three months after martial law ends, and no later than 30 days after losing the status (Law No. 2115-IX).
Risks of losing the status
The Ministry revokes the status for non-compliance with Article 37, a compliance report over 20 working days late or late twice in a row, misuse of exempt profit or false data (Article 39, part 4). The exemption is lost from the first day of the period in which non-compliance arose: the company files amended returns and pays tax and late-payment interest, with no statute of limitations and no martial-law relief on interest (subparas. 76.1–76.5). A company that lost the status cannot reapply within 12 months.
Considering Defence City? Key Solutions can model what the regime means for your company, including investment plans and dividend policy, as part of our tax optimisation service. Our tax and accounting set-up service builds the income analytics and the exempt profit register, and our tax advice covers specific questions. Fees are agreed individually. Phone: +38 (068) 777-14-74.
Frequently asked questions
What is Defence City in simple terms?
Defence City is a legal and tax regime for Ukrainian defence companies until 1 January 2036. The Ministry of Defence grants resident status, and residents are exempt from corporate income tax on reinvested profit, land tax, real estate tax and environmental tax (para. 76, subsection 10, Section XX of the Tax Code).
Is a Defence City resident fully exempt from corporate income tax?
Only profit reinvested by 31 December of the following year and not paid out as dividends is exempt. The unused part is taxed under general rules, and transfer pricing adjustments and CFC profits are taxed at the standard rate (subpara. 76.1 of the Tax Code).
Who keeps the Defence City register?
The Ministry of Defence of Ukraine holds and administers the register (Article 40, part 3 of the Law on National Security; register procedure approved by Cabinet Resolution No. 1745 of 17 December 2025).
Can a sole proprietor become a Defence City resident?
No. Only a legal entity that pays corporate income tax can become a resident (Article 37, parts 1 and 7).
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