In the previous article, we outlined what residency in the Defence City legal regime delivers: exemption from corporate income tax conditioned on reinvestment, exemption from land and environmental taxes, simplified customs administration and exports, confidentiality of register data, and draft deferrals for employees. This article answers the next two questions, which are more practical: how weapons manufacturers obtain the status, and what restrictions it imposes.

Start with the concept itself, because the name misleads. Defence City is not a city, a territory, an industrial park, or a fenced zone. It is a legal status that a weapons-manufacturing company obtains and carries with it, wherever its workshops stand. A manufacturer in Lviv and a manufacturer in the Poltava region can be residents of one and the same Defence City while sharing nothing but the set of rules they operate under.

The model itself is simple. The state defines whom the support is meant for: a company must manufacture defense products rather than trade in them, keep a transparent ownership structure, and have no ties that create a security risk. A company that believes it qualifies declares as much, backs it up with documents, and is entered in the register. From the day of entry, a different rulebook applies to it than to the rest of the market. This is the logic of a club with membership terms, not the logic of an administrative territory. The mechanism is not new: the Diia City regime for the IT sector has run on the same model for several years, and it is this model that was carried over into the defense industry. The regime is limited in both time and purpose: it runs until January 1, 2036, but no later than the year Ukraine joins the European Union, and it applies to defense manufacturing only. Entry into the regime is voluntary.

The state's underlying design explains nearly every condition of the regime. The industry's production capacity far exceeds what the budget can buy, so the state has no funds to finance capacity expansion directly. What it can do is forgo the tax if that money goes into new capacity. In other words, the state is not giving away a benefit; it is buying specific behavior with it: expansion of production instead of profit extraction. Hence the regime's central condition—and the ban on channeling exempted profit into dividends. This condition is the heart of the bargain, and most of the restrictions that follow trace back to it.

The regime has now been through its first six months. The first resident, in early January 2026, was Skyfall, a maker of drone-interception systems; as of July 21, 2026, the register counts 45 residents with combined qualified income above UAH 93.5 billion (about $2.2 billion); one applicant has been refused, and no resident has yet lost the status. The numbers say the procedure works. They also show the scale: 45 companies in an industry with hundreds of manufacturers.

The main thing to grasp about this regime lies outside the list of benefits. Defence City is engineered not as a tax break but as a status with a standing burden of proof. Entry passes through two stages of review, the status is confirmed annually by a report with an auditor's opinion, and losing it triggers a tax recalculation with no statute-of-limitations protection. A company that reads the regime as a one-off gain underestimates its compliance demands. A company that sees it as a long-term status plans it differently—and that difference is what follows.

The Procedure for Obtaining Defence City Residency

The status is open to a Ukrainian legal entity that pays corporate income tax on general terms and meets the qualified-income test. Qualified income is income from the sale of defense goods of the company's own manufacture, and from work and services relating to defense goods: their development, manufacture, repair, modernization, or disposal. Its share must be at least 75% of total income—at least 50% for aircraft-industry entities—calculated for the preceding calendar year under a dedicated Methodology approved by the government. Compliance is assessed on the financial statements for the annual reporting period preceding the date of application. Hence the first practical consequence: as a general rule, a newly formed company cannot obtain the status from day one, because the share must be proved for a completed period.

The application is filed with the Ministry of Defense in the prescribed form and in Ukrainian. Its content goes beyond a simple questionnaire: details of the applicant and the statutorily required information on its officer, the list of business activities, the qualified-income share for the preceding calendar year, and information on the performance of state defense-procurement contracts over the preceding calendar year and on participation in them as a co-contractor or subcontractor—the latter matters precisely for calculating qualified income. Supporting documents are attached, and the applicant bears responsibility for the completeness and accuracy of the information.

There are two equally valid ways to file: on paper, by mail to the Ministry of Defense, or electronically, to its official email address. The only difference is the signature: the first requires the handwritten signature of the company's head or an authorized person; the second, a qualified electronic signature of the head or of a representative acting under a power of attorney. A small detail—and the easiest place to lose time.

From there, the procedure has two distinct stages, and conflating them is a mistake. The first is formal. The Ministry of Defense has 5 business days to check for grounds to return the application without review. If such grounds exist, the applicant receives a reasoned decision describing the defects. If no return decision is sent within that window, the application is deemed accepted, and no grounds for return exist. The rule cuts in the applicant's favor: uncertainty is capped at 5 business days.

The second stage is substantive, with 10 business days from receipt of the application. The Ministry checks the applicant against the requirements of Article 37 of the Law of Ukraine "On National Security of Ukraine," analyzes qualified income under the Methodology, verifies the accuracy of the information submitted, and—a separate item of review—establishes whether the applicant previously held resident status and on what grounds it was lost. That last check means re-entry after losing the status is not a clean slate.

A decision granting the status takes effect on the day it is adopted and is sent to the applicant the same day in electronic form under a qualified electronic signature. Simultaneously, the Ministry enters the record in the register—without delay and no later than 2 business days from the decision—and sends an extract. The register itself is a separate state information system held and administered by the Ministry of Defense; all information in it is classified as restricted official information, and limited-access data is handled under information-protection and state-secrets rules. A resident receives its extract free of charge and must be notified of any third-party requests concerning its data. In other words, the confidentiality we listed among the regime's advantages is built into the register's very design. A resident must report changes to its register data within 5 business days.

Obtaining the status completes only the first stage. Annual confirmation follows, and it is stricter than entry. No later than June 1 of the year following the reporting year, a resident files with the Ministry of Defense a compliance report covering January 1 through December 31 of the preceding calendar year; the first report covers the year in which the status was granted. Integral annexes are the annual financial statements and a report by an audit firm on its review of the compliance report. The auditor requirement has teeth: such a report may be issued only by an audit firm authorized to conduct statutory audits of public-interest entities. That pool is small, which is why auditors are engaged well in advance—not in May.

A report is returned without review if the filing deadline is missed, the form or signature requirements are not met, the financial statements or the auditor's report are missing, or the auditor did not meet the statutory requirements as of the report date. A returned report is deemed not filed. If the report is reviewed on the merits and the Ministry finds signs of noncompliance or discrepancies between the report and its annexes, the resident receives a reasoned notice and has 15 business days to submit written explanations with supporting documents. This is the only procedural window for defending the status, which is why the response is prepared at once rather than at the deadline.

Restrictions

The regime's restrictions lie in three planes: who cannot become a resident at all, how the benefits may be used, and what happens if the status is lost. The first plane is the widest and the most often underestimated.

Outside the regime remain companies under sanctions or connected to a sanctioned person; those whose participants or ultimate beneficial owners come from FATF blacklist jurisdictions; those with tax debt above 10 minimum monthly wages—above UAH 86,470 (roughly $2,000) at the 2026 minimum wage of UAH 8,647; those found within the past 12 months to have breached obligations under a state defense-procurement contract; enterprises in bankruptcy or dissolution proceedings; and those located or operating in temporarily occupied territory. Nonprofit organizations and single-tax payers cannot be residents: the regime is built exclusively for corporate income tax payers. Two items on this list deserve special attention, because they surface last—a comparatively small tax debt and a history of breaches under a defense contract.

The subtlest criterion concerns the aggressor state, because it defines the permissible ownership structure. The law treats as persons connected with the aggressor state: citizens of the Russian Federation; legal entities incorporated and registered under its law; and Ukrainian companies in which the Russian Federation, a Russian citizen, or an entity registered in Russia is the ultimate beneficial owner or holds a stake of 10% or more in the charter capital. An applicant may have no such participant or beneficiary and may not be controlled by a resident of the aggressor state. For a foreign investor with a layered structure, this is a concrete diligence task: a ten-percent stake can accumulate indirectly, through intermediate companies, which is why the ownership chain is traced to the ultimate level before filing—not after a refusal.

The second plane is restrictions on using the benefits. The main one has already been mentioned; here it should be unpacked in full. The income-tax exemption applies on condition that the freed-up funds are reinvested in the purposes defined by law: creating or upgrading the production base, modernizing fixed assets, deploying new technologies, acquiring intellectual property rights for defense orders, and researching and developing new weapons and equipment. The deadline is December 31 of the calendar year following the tax (reporting) year. If the funds go unused, the taxpayer assesses and pays the tax on the unused portion, plus penalty interest.

From this follows the restriction that shapes the entire financial model of a project. A condition of the exemption itself is that the company neither declares nor pays dividends; the only exception is dividends payable to the state budget or to state enterprises and wholly state-owned companies, and directing exempted profit to any other distributions to owners is treated as misuse. An investor effectively chooses one of two scenarios: reinvest the profit in production and pay no tax, or pay the tax and distribute the profit. Combining both out of the same funds will not work. This decision is made deliberately and in advance, because it cannot be reversed after the fact.

The property benefits are not blanket either, and the incompatibility with Diia City is broader than it is usually read. The income-tax exemption itself applies only if the taxpayer is not a Diia City resident. The exemptions from land tax and real-estate tax, per the State Tax Service's guidance, likewise do not extend to those combining the two statuses and are tied to specific assets: land plots under production facilities used in the resident's business; plots temporarily idle during relocation, provided they have not been transferred to third parties; and, for real estate, properties in the relocation locality that are not leased out and are used in the resident's operations or to house its employees. For a company weighing the two regimes together, this is a matter for advance calculation.

A separate word on exports, to which the next article in this series is devoted. The resident's advantage here is narrower than it is often described. Law No. 4577-IX added to the Law of Ukraine "On State Control over International Transfers of Military and Dual-Use Goods" a provision under which business entities that develop or manufacture military goods and hold Defence City resident status may export such goods without obtaining the authorization required by Article 13 of that Law. The exemption covers the authorization—that is, the general clearance to engage in export activity. A permit for each individual transfer is still obtained on general terms, including the fee for its issuance. The phrase "a resident exports without permitting procedures" would be wrong.

The third plane is the consequences of losing the status, and they are asymmetric to the benefits. If the Ministry of Defense establishes noncompliance with the criteria or misuse of the benefits, it adopts a decision on loss of status. The company then files amended tax returns and assesses and pays the taxes with penalty interest—and the statutes of limitations under Article 102 of the Tax Code do not apply. That means the recalculation can reach back over the entire period spent in the regime. Add the procedural consequence noted above: a prior loss of status is examined on any new application.

Three Checks Before You File

Defence City works: the register is filling, the procedure runs within the stated deadlines, refusals are rare. But it is better read as a status with a standing burden of proving compliance.

For an investor, the entry decision comes down to three checks, all done before filing. First, ownership structure: the chain of ownership is traced to the ultimate level against the ten-percent aggressor-state criterion, sanctions ties, and FATF blacklist jurisdictions. Second, the financial model: reinvesting profit and paying dividends are mutually exclusive under this regime, so the way capital will be returned is chosen at the start. Third, operating discipline: the annual report with an opinion from an auditor licensed for public-interest-entity audits requires a standing process—one-off engagement of a consultant will not do.

The last thing to hold on to: leaving the regime costs more than entering it. Loss of status triggers a tax recalculation with no limitation-period protection and complicates any new application. The regime therefore makes sense for companies with a long horizon and a clean structure; for those counting on quick tax savings, it is more of a trap.

The regime has already proved its registration tempo, and the register will most likely keep adding residents month by month. The real maturity test will be the first contested case—a decision on loss of status and how the Ministry of Defense applies the 15-business-day explanation window. If that window operates as a genuine defense mechanism, trust in the regime will grow faster than the list of benefits; if it proves a formality, cautious investors will price status risk into the cost of entry.

The next article in this series is devoted to exports: how authorizations and permits work, what it costs Ukrainian weapons manufacturers to reach foreign markets, which states deliveries are allowed to, and on what terms technology can be transferred.

Read more in the upcoming articles!

Author: Valentyn Gvozdiy — founding partner at GOLAW (Kyiv), advises international clients on corporate law, regulatory matters and the defense sector; contact details are available at golaw.ua. This article is general information, not legal advice, and does not create an attorney–client relationship.