A practical guide for defense manufacturers, funds and industrial groups considering manufacturing, a joint project or an acquisition in Ukraine — what you can own, who approves what, how the state buys and pays, and how war risk is assessed and allocated.

Four years of full-scale war have changed Ukraine’s defense industry beyond recognition. According to the National Security and Defense Council of Ukraine (NSDC), annual production capacity has grown fifty-fold and now stands at around USD 50 billion, while the state spends between USD 12 and 15 billion a year on Ukrainian-made weapons. Capacity has begun to outstrip the budget: according to the NSDC’s forecast, if every production line were funded, the sector could turn out around USD 55 billion worth of products in 2026. And it is the permission to export military goods, in effect since July 1, 2026, combined with foreign capital, that can unlock this potential in full.

Why Ukraine and why now

Owing to the armed conflict in Iran in early 2026, interest in Ukrainian counter-UAV systems, which have proven their effectiveness against mass attacks by loitering munitions, has surged on the global arms market. Our displays attract enormous attention at leading international exhibitions such as the World Defense Show in Saudi Arabia and Eurosatory in France. Long-range and medium-range strike unmanned systems, remote fire control technologies and integrated AI have passed the test of real combat.

Ukraine today is a unique platform for developing state-of-the-art military technology solutions, since it is precisely conflicts between two powerful armies that create the conditions necessary for defense production to thrive and, at the same time, make it possible to promptly test the most advanced prototypes in combat conditions.

What is Ukraine’s Defence City special preferential regime?

Defence City is a special support regime for defense manufacturers in Ukraine, introduced by government decisions of December 2025. Companies joined quickly: by the end of July 2026, the register counted forty-five residents whose combined revenue from arms sales exceeded USD 2.1 billion, and only one applicant had been refused.

The package of benefits is substantial. Residents pay no corporate income tax provided that the profit is reinvested in production or development by the end of the year, and no land fee or environmental tax without any such condition. They enjoy a simplified customs regime for imported components and equipment, may export military goods under a simplified procedure, and their data in the register is closed to public access. Residency also automatically grants a company “critically important” status, which makes it possible to reserve up to 100% of employees liable for military service, that is, to arrange a deferment from mobilization for them. To enter the regime, you need to file the relevant application with the Ministry of Defense.  

It should be noted that these benefits are not granted to just any defense company by the mere fact of its operations. All companies that do not have the Defence City regime must obtain the full list of permits from the government to carry out export activities, as well as pay the full corporate income tax rate. In my next article, I will tell you more about the Defence City special preferential regime, because it truly deserves a separate review.

Who buys the manufactured products and how does pricing work?

The buyer of weapons is the Defense Procurement Agency. Alongside classic contracting, it operates DOT-Chain Defence — a state marketplace where combat units themselves choose the equipment they need from more than a thousand items offered by over two hundred manufacturers, and according to government data, around 95% of all drones bought by the state are made by Ukrainian manufacturers. 

As of mid-2026, the government caps the profit a supplier may build into the price of a defense contract. There is no single figure for the whole sector. The cap depends on what you sell and how the contract is concluded. For Ukrainian-made unmanned systems and tactical-level electronic warfare equipment, profit may not exceed 25 percent of the production cost. For other goods procured without a tender, the cap is set by a separate government decision. Your earnings depend on the cost base you create in Ukraine — assembly, testing, work with components, engineering hours. 

Payment terms are subject to the same rules. The state customer sets the amount and term of the advance payment directly in the contract: for defense goods, this is up to 70% of the value for a term of up to twenty-four months. Since January 2026, multi-year contracts have been expressly recognized, and the advance payment is set for each budget year. The import side is also favorable: components and equipment for drone production are imported into Ukraine free of import VAT and customs duty for the period of martial law provided that the end recipient is located in Ukraine. 

Exports: the door is opening

All these years, everything Ukraine produced never left the domestic market. That changed on July 1, 2026, when the government approved a full export mechanism. The Ministry of Foreign Affairs keeps a list of partner states to which supplies are permitted; only confirmed surplus may be exported, and the front is supplied first; one-fifth of the proceeds from sales of finished products abroad goes to a special defense fund; the rules apply for as long as martial law continues.

In parallel, two new channels are opening. The first is direct controlled exports. The second is “Build with Ukraine”: joint production lines in partner countries, with research and development kept in Ukraine. Defence City residents start this race with an advantage: they may export their products without the separate authority to conduct exports that everyone else has to obtain.

War risk? Insure it!

War risk in Ukraine is not something unknown. It has been assessed and insured — and it is being insured right now!

Since January 2024, the Export Credit Agency has been able to insure war and political risks for foreign investors in production projects. MIGA, the World Bank’s guarantee arm, had provided Ukraine with USD 573 million in guarantees by June 2026. It covered an industrial park in Lviv against war and civil disturbance for a term of up to ten years and, together with the US DFC, insured a production project, with each institution taking on around USD 25 million for fifteen years. That same month, the two agreed on a joint framework program of political risk insurance for the US–Ukraine investment fund.

Whether a policy pays out is determined by the wording, not by the hit. Sums insured, the list of insured assets, territorial limitations, the definition of a war event and the evidence to be submitted after an incident — these are legal matters. They are settled before the contract is signed, and it is they that determine whether the company will receive indemnity years later. This is exactly where you will be helped by the expertise of GOLAW.

Although the domestic insurance market has considerable room for improvement, Ukrainian insurance companies are already concluding property insurance contracts against war risks. Since January 2026, the state has been supporting this market. Under a program administered by the Export Credit Agency, a company in any part of Ukraine can recover part of what it has paid for insurance — up to UAH 3 million per year. In ten high-risk regions, direct compensation for damaged or destroyed property is also available — up to UAH 10 million per company. Buildings and production equipment are covered: machine tools, instruments, devices. Payment is not limited to a direct hit: shock waves, falling drones and debris also count.

By August 2026, the credit agency had approved 139 applications from businesses in frontline areas for around UAH 2.67 billion in potential compensation and made the first full payouts for damaged property. At the same time, the government cut the paperwork: one application now covers all damaged facilities, and ownership title to them is enough to take part.

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.