In Ukraine, the special regime Defence City has officially started operating, designed to become a driver for the development of the domestic defense-industrial complex. However, after two months of the program's operation, only one company has managed to obtain resident status. Vice-President of the "Ukrainian International Institute of Recovery", expert of the NGO "Economic Discussion Club" Ihor Harbaruk, in an exclusive comment to UNN, explained that, in his opinion, the problem lies in the lack of a systemic approach by the state and the need for targeted legislative improvements.
Defence City can become an effective tool for the development of the defense industry
According to Ihor Harbaruk, the Defence City mechanism itself can be effective, but only if there is real synergy between the state and manufacturers.
"For it (Defence City – ed.) to work not declaratively, it needs to be worked with. That is, in fact, both the state and arms manufacturers must be interested in this. And for this to be such a synergistic cooperation," the economic expert noted.
Regarding arms manufacturers, Harbaruk emphasizes that they must be responsible for the quality of weapons and equipment they produce. After all, defense production is a highly professional segment where mistakes can cost lives.
In this context, according to the expert, it is necessary to strengthen quality control of goods produced by defense industry enterprises.
Are the requirements for residents really excessive?
Despite criticism from some market representatives and a number of experts, Harbaruk does not consider the criteria for joining Defence City to be entirely unrealistic.
"Honestly, I reviewed all the requirements for this project, this program – there is nothing impossible there," the expert noted.
According to him, the key requirement concerns the income structure, and potential residents need to properly prepare the documents required for an application to join the special regime. "The company must be legitimate, not just some individual entrepreneur," Ihor Harbaruk noted.
However, for Defence City to work effectively, legislation needs to be adapted to current market realities.
One of the most controversial requirements of Defence City is the complete absence of criminal proceedings involving potential residents. The expert points out that in current conditions, investigators often uncontrollably and without any responsibility open unsubstantiated criminal cases.
"The fact that our services (law enforcement agencies – ed.) get excited and bring charges and so on, that's another matter. And, perhaps, indeed during the war, again, given that, let's say, our services also show activity, sometimes correctly, sometimes absolutely without responsibility, one simple thing needs to be done: there must be criminal liability for those people who open these (unsubstantiated – ed.) cases. That's all. As soon as there is criminal liability for the investigator, for the one who initiates this criminal case, then there will be significantly, significantly, significantly fewer of them (unsubstantiated criminal cases – ed.)," Harbaruk explained.
In this context, the key criterion for evaluating an enterprise should be a court verdict, not the mere fact of opening criminal proceedings.
"Until there is a court verdict, all this, let's say, is written with a pitchfork on water," Harbaruk noted.
At the same time, in his opinion, market representatives should come up with an initiative to review the norm on the absence of criminal cases involving potential residents.
The defense industry should become the basis of the economy for the next 10-12 years
Ihor Harbaruk is convinced that Defence City is not just about the tax regime, but about a strategic economic model in general. It can become the basis of the Ukrainian economy in the next decade.
"The defense-industrial complex must become and be the basis of Ukraine's economy for the next 10-12 years. We will see later, but for the next 10-12 years, 100% the defense-industrial complex must be the basis. And everything else should be formed around it," Harbaruk noted.
He emphasizes the need for systemic state support for national manufacturers, so that Ukrainian enterprises, and not foreign ones, receive state orders.
An important aspect, according to the economic expert, is also the development of exports of defense industry goods. "We really need to develop exports. And it must develop exclusively with the support of the state itself," Harbaruk noted.
Here, in his opinion, Ukraine should follow the example of Turkey, the USA, and Germany, which actively lobby for the products of national defense companies in the international arena.
Therefore, the expert is convinced that Defence City should be not only a mechanism for quickly launching the production of weapons and equipment, but also a tool for long-term improvement of product quality and competitiveness of the domestic defense industry.
Recall
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 designed to create favorable conditions for scaling up defense production, attracting investment, and developing the Ukrainian defense industry.
Defence City residents receive a complex of economic and operational incentives that are intended to reduce the fiscal burden and accelerate production development. This includes exemption from corporate income tax on the condition 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 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.
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 against whom sanctions have been applied, or who are associated with a person against whom sanctions have been applied.
Legal entities against whom a violation of obligations under a state contract for defense procurement has been established within the last 12 months; who 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.