The aviation industry remains one of the few sectors of the Ukrainian economy with high added value, long investment cycles, and significant export returns. In the conditions of a full-scale war, it not only preserves critical technological competencies and jobs but also continues to generate foreign currency and tax revenues. In these circumstances, it is important for the state to continue supporting the aviation industry in Ukraine, believes Ruslan Melnychenko, head of the legal committee of the Aerospace Association of Ukraine.
"The aviation industry is one of the few sectors with high added value, long investment cycles, and significant export returns. During the war, it not only maintains critical competencies but also continues to generate foreign currency revenue and taxes," noted Ruslan Melnychenko.
Abolition of special regimes and rising cost of capital
At the same time, according to him, the government's decision to abolish special tax regimes for aircraft manufacturing from January 1, 2025, is already having negative economic consequences. Such an approach to regulation has created cost inflation, disrupted working capital, and caused a risk of contract disruption where profit tax was not included in prices.
Ruslan Melnychenko noted that for the aviation industry, which has a long development and certification cycle, this means not just an increase in the tax burden, but an increase in the cost of capital and a loss of competitiveness.
"For industries with a long development and certification cycle, this means an increase in the cost of capital and a loss of competitiveness precisely when the country needs jobs, exports, and technological sovereignty," explained the head of the legal committee of the Aerospace Association of Ukraine.
Aviation industry preserved thanks to benefits
Separately, Melnychenko refutes the common thesis about the inefficiency of industry benefits. According to him, thanks to the benefits that were in effect in the aviation industry until January 1, 2025, Ukraine preserved the full cycle of creating and maintaining aviation equipment, implemented new types of aircraft and engines, and modernization programs allowed to retain jobs and competent employees.
"In the market for servicing and repairing Soviet-designed helicopters after major overhauls in Ukraine, the service life of the machines is 4-8 years, and about 40% of foreign currency revenue from services returns to the economy. This is an example of how 'long' industries return more to the state through salaries, VAT in supply chains, and exports, than through an immediate profit tax in the year of investment," Ruslan Melnychenko gave an example.
Defence City as a tool to reduce the cost of capital
Melnychenko calls regulatory predictability the second systemic factor.
"The second systemic factor is regulatory predictability. The EU applies strict import-export restrictions on the Russian Federation, but accompanies them with detailed exceptions and transitional provisions so that bona fide operators can plan supplies and services. When the interpretation of 'origin/territory' norms for pre-war products from third countries is homogeneous, businesses reduce transaction costs and risk premium; when not, costs, supply chain disruptions, and credit spreads increase. For aviation, this directly translates into a loss of margin on export contracts and an outflow of personnel," he noted.
In this context, according to Melnychenko, the special Defence City regime, which provides tax benefits and simplified procedures for defense enterprises, can play a key role. In his opinion, Defence City can become a key tool for reducing the cost of capital and restoring investment cycles, particularly for dual-use manufacturers.
The legislation provides for the special regime to be in effect until 2036, the formation of a register of residents by the Ministry of Defense of Ukraine, as well as tax incentives and simplification of customs procedures.
It should be noted that among the tax incentives are exemption from profit 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 will apply to Defence City residents; special guarantees for the protection of information and confidentiality of enterprise data during the regime; state support for relocation and increased security of production facilities if necessary.
According to Ruslan Melnychenko, the norm regarding the reduced threshold of "qualified income" is especially important for the aviation industry.
"The key norm for aviation is the reduced threshold of 'qualified income' for entry (into Defence City residency - ed.): 75% for most residents and 50% for aircraft manufacturing enterprises. It is this 50% threshold that takes into account the revenue structure of aircraft engines, airborne electronics, and components with a significant share of civilian sales and opens access to the regime for a wide range of manufacturers," explained the head of the legal committee of the Aerospace Association of Ukraine.
According to him, exemption from profit tax, provided that reinvestment occurs, turns the benefit into an "investment buffer" for research and development (R&D), testing, and certification with a long payback period.
Long investments instead of short fiscal effect
In summary, Melnychenko emphasizes the need for a strategic choice by the state.
"Today, the choice is not between 'giving benefits' or 'saving the budget,' but between two models of state revenue: a short fiscal increase due to taxing investments in the year of expenses and a stable flow of taxes and currency due to increased exports, employment, and technological base," the lawyer emphasizes.
According to him, world experience shows that restoring lost aviation competencies takes decades and costs many times more than preserving them.
"For Ukraine, which seeks rapid post-war modernization, the optimal course is long-term investments in aviation with transparent rules and measurable effects: a 50% threshold for aircraft manufacturing in Defence City, reinvestment of profits in R&D, simplification of trade, and unification of import interpretations. This reduces the cost of capital, preserves highly skilled employment, and strengthens defense capabilities," Ruslan Melnychenko summarized.
Recall
As reported by UNN, in early January, the first enterprise – a manufacturer of drones, including "Vampire" and "Shrike" drones and "Shahed" interceptors, which Russia uses for massive attacks on the territory of Ukraine – received Defence City resident status.
During the preparation of key draft laws that create the legal basis for the launch of Defence City – a special regime for supporting the defense-industrial complex, namely draft laws No. 13420 and No. 13421, the proposals of the aircraft manufacturing industry were partially taken into account.
In particular, initiatives to expand the grounds for including enterprises in the Register of Residents were not taken into account – it was proposed to take into account not only contracts of the Ministry of Defense but also international agreements in the field of defense and dual-use. The proposal to add financing of research and development work on aircraft manufacturing to the areas of use of tax-exempt profits was also rejected. The idea of establishing a separate procedure for the use of released funds by aircraft manufacturing entities by decision of the Cabinet of Ministers of Ukraine (by analogy with CMU Resolution No. 476 of 07.06.2017, which was in force until 01.01.2025) was also not supported. In addition, the norm regarding the absence of open criminal proceedings against companies was not softened.
Despite the existence of all by-laws and the declared readiness of the state to support defense industry enterprises, as of early 2026, only one enterprise, as already mentioned, received resident status.
Obviously, this is not about a lack of interest from businesses, but about the excessive complexity of the procedure itself and overly strict selection criteria, which narrows the circle of potential residents.
After the launch of the special regime, it became clear that for many medium-sized manufacturers, including those in the aviation industry, barriers remain a deterrent, even despite obvious financial benefits.
Thus, there is a risk that Defence City may turn into a regime for selected large players and will not become a mass tool for the development of the defense industry.
It is obvious that the Defence City legislation needs refinement. This is not about changing the concept, but about targeted simplification of procedures, clearer residency criteria, greater flexibility regarding financial and formal requirements, and reducing regulatory uncertainty. Without this, the pace of new resident accession and the real effect for the industry may remain very low.