Defence City: Maintaining Resident Status in the Ukrainian Defense Sector (2026 Update)

The Defence City special regime, launched in early 2026 under Law No. 4577-IX, serves as a primary fiscal incentive for the Ukrainian defense industry. Residents benefit from corporate tax exemptions, streamlined customs clearance, and grounds for employee conscription deferrals. However, the admission procedure involves administrative complexities that, if mismanaged, can outweigh the value of the benefits themselves.

Benefits of Defence City Resident Status

• Exemption from corporate income tax, provided the freed funds are fully reinvested in development.
• Streamlined customs procedures for defense-related products, including simplified import and processing regimes.
• Formal grounds to be designated as a 'critically important' enterprise, facilitating the reservation of essential staff from mobilization.

Primary Requirement: 75% Qualified Income

To apply, an enterprise must submit a compliance report verifying that at least 75% of its total revenue from the previous year originated from the sale of defense goods (the threshold is 50% for the aerospace industry). This figure must be validated by a certified auditor. A frequent challenge is the misclassification of income; revenue from auxiliary services or subcontracted component manufacturing may not qualify as defense-related under the law.

The Cost of Non-Compliance

If state authorities identify a failure to meet criteria or the misuse of exempted profits during an audit, the company is liable for all taxes accrued during the benefit period, plus interest and penalties. For a mid-sized defense contractor, such a retroactive assessment can lead to insolvency.

Urgent Update: Critical Enterprise Status and Reservation Deadlines

As of August 2026, the regulatory landscape for defense enterprises has tightened. Following the adoption of Cabinet of Ministers Resolution No. 692, all businesses holding 'critically important' status must undergo a mandatory reassessment. Companies must submit their updated documentation to the Ministry of Defense by August 10, 2026. Failure to meet this deadline will result in the cancellation of the enterprise's status, directly impacting the ability to reserve essential engineering and production personnel from mobilization.

Defence City is not an automatic entitlement but a regime requiring constant compliance: annual threshold verification, mandatory audits, and strict monitoring of reinvestment activities.

Conclusion

Before applying for resident status, we recommend conducting a comprehensive legal audit of your revenue streams, as this is significantly more cost-effective than managing retroactive tax liabilities. Global Miltech Legal provides full support for securing Defence City status, coordinates compliance reporting with our auditor partners, and builds robust defense strategies against potential tax disputes. Contact us for a free initial case assessment.