On February 16, 2026, the State Tax Service of Ukraine published clarifications regarding the application of Article 39 of the Tax Code of Ukraine for companies operating under the special legal regimes of Defense City and Diia City.
The Tax Service emphasized that special tax regimes do not exempt taxpayers from adhering to the arm’s length principle, rules for determining controlled transactions, and transfer pricing (TP) reporting obligations.
This means that residents of Defense City and Diia City must assess their transactions for control, analyze the market conformity of terms, and prepare transfer pricing documentation when the criteria are met.
Defense City: special regime for the defense industry without TP exemptions
The Defense City legal regime was established by Law No. 4577-IX (effective from October 5, 2025) to support enterprises in the defense-industrial complex.
However, applying this regime does not exempt taxpayers from the requirements of Article 39 of the Tax Code. Taxpayers are required to:
- identify controlled transactions according to established criteria;
- apply the arm’s length principle;
- adjust taxable profit if the contract price deviates from the market range.
In practice, if the price of a controlled transaction differs from the arm’s length level, the taxpayer must make the corresponding adjustments independently.
Exceptions: when market comparison may not apply
Certain exceptions exist when goods, works, or services can only be provided by a single manufacturer, supplier, or executor, including a subject of a natural monopoly under the law of its registration country or international law.
The burden of proof for this status lies with the taxpayer. Confirmation must be reflected in transfer pricing documentation or provided upon written request by the tax authority.
Improper justification may lead to tax adjustments and penalties.
Diia City: tax incentives without exemption from controlled transaction analysis
The Diia City special regime, established by Law No. 1667-IX on July 15, 2021, aims to stimulate the IT sector and digital economy.
However, the status of a Diia City resident does not affect the application of transfer pricing rules.
For TP purposes, a business transaction is any transaction, contract, or agreement – regardless of documentation – if it can affect pre-tax profit. For Diia City residents, such transactions include those affecting profit reported under Ukrainian Accounting Standards (NAS) or IFRS.
If a transaction meets the criteria for a controlled transaction (e.g., regarding revenue volume or transactions with related non-residents or low-tax jurisdictions), it must be analyzed according to the methods specified in Article 39 of the Tax Code.
Resident obligations regarding TP reporting
When conducting controlled transactions, Defense City and Diia City residents must:
- submit the Controlled Transactions Report within the prescribed deadlines;
- notify participation in an international group of companies (if applicable);
- provide transfer pricing documentation upon request of the State Tax Service.
Transfer pricing documentation should include:
- justification of the arm’s length conformity of the transaction;
- functional analysis of the parties;
- group structure description (if applicable);
- market and comparable transaction analysis;
- calculations and applied methodology.
Failure to submit reports or documentation, late submission, or incomplete information carries financial liability under the Tax Code.
Key business risks
For companies operating within Defense City or Diia City, risks are not related to resident status, but to:
- incorrect identification of controlled transactions;
- formal approach to market conformity analysis;
- lack of functional analysis;
- insufficient documentation of economic justification for pricing;
- errors in the Controlled Transactions Report.
Given increased attention from tax authorities on international and related-party transactions, companies are recommended to perform preliminary risk analysis and prepare documentation in advance.
Practical recommendations
Regardless of the special regime applied, companies should:
- inventory related-party transactions;
- verify compliance with control criteria;
- assess transfer pricing methods;
- ensure proper preparation of documentation;
- monitor reporting deadlines.
Timely preparation helps minimize tax risks and avoid penalties.
TP consulting, tax support, and audit of Diia City and Defense City Residents by Kreston Ukraine
If you require transfer pricing consulting, documentation preparation, tax audit support, or compliance audit for Diia City or Defense City residents, contact the Kreston Ukraine team.
We help minimize risks, ensure regulatory compliance, and establish a systematic approach to business tax security.
