The special Defence City regime, which launched in January, has not yet gained significant popularity among arms manufacturers and aircraft building enterprises. Andriy Ivanov, a partner at Equity law firm, noted in an exclusive comment to UNN that this situation is due to imperfections in legislation, which makes residency in Diia.City more beneficial for businesses.
After almost three months of the special Defence City regime, which provides tax and customs benefits for companies involved in the defense industry and aircraft manufacturing, it is becoming clear that the innovation is not enjoying significant popularity among businesses. Market representatives, in comments to UNN, explain that this is due to certain legislative gaps that create barriers for potential residents of the special regime.
Among the main deterrents are, in particular, unclear turnover requirements, which effectively limit access for small and medium-sized businesses to Defence City, as well as unclear audit requirements for companies applying to join the special regime. In addition, experts point to the absence of symmetrical tax conditions. This means that companies are forced to pay VAT on Ukrainian-made parts, while this tax is abolished for imported components. The Verkhovna Rada Committee on National Security, Defense, and Intelligence also understands the need to finalize the relevant legislation and awaits market proposals.
Another barrier, experts believe, is an overly strict rule regarding criminal proceedings. A potential resident of Defence City must not be involved in criminal cases in any way. This rule applies even to factual cases without suspicions, indictments, or verdicts. Lawyers interviewed by UNN point to a violation of the presumption of innocence.
According to Ivanov, this last point is one of the most critical.
The issue of open criminal proceedings... believe me, almost every manufacturer, or even related contractors and enterprises, has registered criminal proceedings where someone is investigating something. This is also something that immediately nullifies (the possibility of joining Defence City - ed.)
He reminded that if a Defence City member company loses its resident status, it is obliged to compensate the state for taxes. According to the lawyer, enterprises understand that the opening of a criminal case automatically becomes a reason for losing resident status, and therefore creates uncertainty for businesses.
If this status is lost, accordingly, other problems and questions arise. And therefore, no one wants to go there with the understanding that it (the status - ed.) can be lost at any moment.
Andriy Ivanov separately drew attention to the competition between state special regimes. According to him, today Defence City is inferior in attractiveness to other models, particularly Diia.City.
The Diia.City regime is much more profitable in this regard. The benefits work immediately. The main issue is not capital outflow. And, accordingly, there are no radical advantages in Defense City that would motivate (enterprises - ed.) to switch to it.
The lawyer is convinced that the situation can be corrected, but a quick reaction from the legislator is needed.
Recall
UNN previously wrote that the Aerospace Association of Ukraine is collecting proposals from companies working in the defense industry and aircraft manufacturing enterprises regarding changes to the legislation that provides for the functioning of the tax and customs special regime Defence City. Based on this work, the association plans to submit the developed proposals to representatives of the Verkhovna Rada Committee on National Security, Defense, and Intelligence and to participate in the further refinement of the regulatory framework of Defence City in dialogue with the government and parliament.
Add
The special regime Defence City has started operating in Ukraine. This is an element of systemic state policy in the field of security and defense. This legal regime is intended to create favorable conditions for scaling up defense production, attracting investments, and developing the Ukrainian defense industry.
Defence City residents receive a complex of economic and operational incentives that should reduce the fiscal burden and accelerate production development. This includes exemption from corporate income tax, provided that defense industry enterprises reinvest funds in their development, as well as exemption from land, property, and environmental taxes.
In addition, simplified customs procedures apply to residents; special guarantees for the protection of information and confidentiality of enterprise data during the regime; state support for relocation and increased protection of production facilities if necessary.
An enterprise can obtain Defence City resident status if the legal entity meets the requirements for the share of qualified income (income from the sale of self-produced defense goods or the performance of work and/or provision of services related to defense goods) for the previous calendar year, and there are no circumstances for disqualification of such person.
The share of qualified income must be at least 75% of the legal entity's total income (with exceptions) and at least 50% of the total income for aircraft manufacturing entities.
A company registered under the laws of a foreign state or that has violated the requirements for disclosing information about the ownership structure or ultimate beneficiaries cannot be a resident.
An enterprise cannot be included in the register if its shareholders/participants include persons associated with the aggressor state, or if sanctions have been applied against it, or if it is associated with a person against whom sanctions have been applied.
Legal entities against which a violation of obligations under a state contract for defense procurement was established within the last 12 months; which are not corporate income taxpayers or are included in the register of non-profit institutions and organizations cannot join Defence City.
An enterprise cannot become a resident if it has tax debt exceeding 10 minimum wages; if it is located and operates in the temporarily occupied territory of Ukraine, and is also involved in criminal proceedings.
The Ministry of Defense announced that the first company received resident status.