Our client, a company operating in the defense sector, engaged Kreston Ukraine to confirm compliance with the requirements of the special legal regime Defence City.
The key objective of the engagement was to provide an independent assurance report on the resident compliance statement for submission to the Ministry of Defence of Ukraine.
What is Defence City
Defence City is a special legal framework designed for enterprises within the defense-industrial complex. It requires:
- at least 75% of qualified income derived from defense activities;
- participation in the execution of defense contracts;
- a transparent ownership structure;
- absence of sanctions and compliance risks;
- mandatory independent assurance by an auditor.
For defense companies, Defence City status provides tax incentives, access to strategic contracts, and enhanced competitive positioning.
Our approach
The project involved several complexities, including the novelty of the regulatory framework, high transaction volumes (multi-billion turnover), a large number of contracts, and complex supply chains involving subcontractors and partners.
These factors increased the risk of misclassification of qualified income and required a specialized audit methodology.
We conducted the engagement in accordance with ISAE 3000, applying a comprehensive approach:
1. Financial analysis
- sample reconciliation of financial statements with accounting records;
- revenue structure verification;
- analytical procedures.
2. Contract review
- assessment of contracts for defense-related purpose;
- sample testing of key contracts;
- confirmation of revenue with counterparties.
3. Compliance and risk assessment
- ownership and beneficial ownership analysis;
- sanctions screening;
- tax compliance review;
- verification of absence of legal restrictions.
Key results
Based on the independent assurance procedures, we confirmed:
- over UAH 10 billion in revenue;
- more than 98% qualified income;
- 40+ contracts contributing to qualified income.
We concluded that the information presented in the report is accurate in all material respects, and the company meets the Defence City eligibility criteria.
Auditor’s conclusion
Following the procedures performed, we issued an independent assurance report under ISAE 3000 confirming that the compliance report meets the established Defence City criteria and may be submitted to the Ministry of Defence of Ukraine.
Client value
✔ ensured compliance with regulatory requirements;
✔ minimized the risk of rejection by government authorities;
✔ improved transparency of business processes;
✔ obtained Defence City resident status (based on the Ministry of Defence order).
Business impact
Beyond formal compliance, the project helped the client strengthen its financial control systems, improve contract structuring practices, and enhance internal compliance procedures. This is critical for continued cooperation with government customers and international partners.
How Kreston Ukraine can help
Kreston Ukraine provides:
- Defence City compliance audits;
- preparation and verification of compliance reports;
- due diligence and compliance reviews;
- income structure and contract base analysis.
Contact us to assess your readiness for Defence City or to mitigate regulatory risks.
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This report is based on the analysis of financial, contractual, and compliance data provided by the client in accordance with Defence City requirements and ISAE 3000.
It does not constitute a legal or regulatory guarantee of obtaining status and is based on information available as of the date of the engagement.
