The Government of Ukraine has approved a set of regulatory decisions introducing Defence City, a special legal regime, aimed at stimulating and systematically developing the defense industry. The application of the new regime began on January 5, 2026.
According to Prime Minister Yuliia Svyrydenko, today about 50% of weapons for the Armed Forces of Ukraine are produced domestically, and the introduction of Defence City aims to further increase production capabilities and form a sustainable defense ecosystem.
Main benefits and advantages for residents:
1. Tax benefits:
• exemption from income tax provided that the income is reinvested in development and production;
• land tax exemption;
• real estate tax exemption (under certain conditions);
• environmental tax exemption.
2. Simplified customs procedures for importing components and exporting defense-related goods (without special permits).
3. Support for the export of military products and technologies under simplified rules.
4. State support for the relocation and protection of production facilities (including security measures).
5. Some special rules for currency control and transactions introduced by the National Bank (according to laws).
Key Government decisions
1. Procedure for obtaining Defence City resident status
The regulatory package forms a unified and formalized approach to obtaining the status of a Defence City resident. The procedure for forming and maintaining a register of residents, as well as the procedure for submitting, reviewing and making decisions on applications from business entities to join a special legal regime, has been specified.
Special attention is paid to economic participation criteria: The approved methodology for measuring the share of defense-related (qualified) income is a key element of selection and ensures targeted application of the regime, preventing its formal use without actual defense activities.
What is needed for residency?
1. A legal entity in Ukraine.
2. The core activity is defense-related (production, R&D, repair, components, dual-use).
3. The key revenue criterion is a significant share from defense-related contracts (the threshold is set by the Cabinet of Ministers).
4. Absence of tax debts, sanctions, or ties with the aggressor state.
5. Transparent ownership structure.
6. Submission of an application + a package of supporting documents to the authorized body.
2. Control mechanisms, audit and statement of compliance
The Defence City legal regime provides for a system of constant regulatory oversight. The Government has established a procedure for controlling the use of tax-exempt profits, which should be directed exclusively to the development of core activities of defense-industrial complex enterprises.
A key element of this system is the statutory audit of residents’ financial statements, which, in particular:
confirms the reliability of the resident’s financial statements;
checks the structure of revenues in order to assess the compliance of actual defense-related activities with the requirements of the special legal regime;
confirms the legality of the application of tax benefits, in particular regarding the reinvestment of income and its targeted use;
provides annual confirmation of the resident’s compliance with established criteria, without which the status may be suspended or canceled.
This approach minimizes the risks of irregularities, increases the transparency of residents’ activities, and ensures predictability of the application of the Defence City regime for both business and the state.
3. Protection of sensitive information and security aspects
Given the specifics of defense-related activities, regulatory decisions provide for certain information protection tools. Defence City residents have the right to address the Ministry of Defence of Ukraine with applications to restrict access to certain information in public registers for security reasons.
This mechanism reduces the risks of disclosing information about production facilities, supply chains, ownership structure, or operational activities of enterprises, while maintaining a balance between transparency and national security.
4. Relocation of production and financing
The procedure for relocation and measures to increase the security of production facilities of Defence City residents has been approved. Mechanisms for interaction between central and local authorities have been identified, as well as approaches to financing, monitoring, and reporting.
The overall coordination of the processes is carried out by the Ministry of Defense of Ukraine, while regional military administrations must identify responsible persons at the regional level within a month.
Funding is provided for in the State Budget of Ukraine for 2026. In particular, 50% of the personal income tax (PIT) paid by Defence City residents is carried over to a special fund in the budget of the relevant territorial community and can be used to develop infrastructure, support relocation, or increase the security of production facilities.
Thus, the introduction of Defence City forms a more structured and predictable approach to state support for the defense-industrial complex, combining tax and organizational incentives with enhanced security and control mechanisms, including statutory auditing.
For potential residents, the key factors are early assessment of compliance with qualification criteria, correct planning of income structure, and readiness for regular confirmation of status within the special legal regime.
