The Aerospace Association of Ukraine has prepared its proposals for amendments to the legislation regulating the functioning of the special tax and customs regime Defence City. This concerns a comprehensive revision of the norms required to obtain resident status, tax incentives, and mechanisms of state support for the defense-industrial complex. The Association directly states: without correcting the current rules, this instrument risks remaining declarative and, in practice, will not be able to become a driver of industry development, writes UNN.
The proposals of the Aerospace Association of Ukraine, which we are submitting for consideration by the relevant committee of the Verkhovna Rada and people's deputies, cover several key blocks at once – from the criteria for selecting companies to the logic of tax incentives and the administration of the regime itself. Our main goal is to make Defence City more inclusive for the market, without losing state control
According to him, the Association collected wishes from market players and developed proposals for changes to the legislation.
One of the most debated points is the requirement for the share of defense revenue. The current model, in our opinion, provides for an excessively high participation threshold, which, according to our estimates, cuts off a significant part of enterprises working in adjacent segments with the defense-industrial complex or being suppliers of components. The Aerospace Association proposes to significantly reduce this indicator – from 90% to 50%
According to him, this approach allows integrating into the system not only arms manufacturers but also a wider pool of companies that form value chains in the defense sector.
Taking into account our proposals will allow changing the approach of Defence City, which is currently: from a narrow "club of the chosen" to an industrial ecosystem where both large manufacturers and medium-sized businesses can operate. This is especially relevant in wartime conditions, when the speed of scaling production often depends on the flexibility of cooperation
The second important block, according to the head of the legal committee of the Aerospace Association of Ukraine, concerns simplifying the procedures for obtaining resident status. In the current version of the legislation, this process provides that companies must go through a bureaucratic procedure through the Ministry of Defense. The Association proposes to introduce a more automated model: if an enterprise is included in the list of enterprises of the defense-industrial complex, it automatically receives the status of a resident of Defence City. According to Ruslan Melnychenko, this approach will reduce the administrative burden and significantly shorten the time to obtain resident status.
It is also proposed to expand the grounds for including enterprises in such a list. It is proposed to consider the participation of companies in international defense contracts or interdepartmental agreements as a sufficient basis for obtaining status. This directly corresponds to the task of integrating the Ukrainian defense industry into global markets and production chains, the Association believes.
We place significant emphasis on the tax component. We propose not only to preserve but also to detail the mechanism of exemption from corporate income tax for defense industry enterprises with a clear condition of reinvestment of funds. This refers to directing resources to modernize production, purchase equipment, develop technologies, intellectual property, and improve staff qualifications. Thus, tax benefits will be tied to the development of the production base, and not just to reducing the fiscal burden
Another block of proposals concerns the criteria for refusing to include an enterprise in Defence City. In the current version, they are formulated quite rigidly and, according to the association's assessment, do not always correspond to the realities of the Ukrainian economy.
We propose to soften the approach to the presence of tax debt: to allow enterprises to obtain status on the condition of its gradual repayment within a defined period. This is an important signal for companies that operate in difficult financial conditions but have the potential to develop defense production. The association also proposes to review some of the restrictions that actually duplicate other mechanisms of state control or create excessive barriers for business. In this context, it is about the balance between security requirements and economic feasibility
It also concerns the regulation of the use of released funds. The proposed changes provide that such resources should be directed to specific production and innovation goals, including supporting defense forces.
In addition, the proposals provide for a more flexible approach to the relocation of defense industry enterprises, which is critically important in the conditions of a full-scale war and constant enemy shelling. In particular, the terms and mechanisms for changing the location of enterprises are clarified while maintaining their status and access to Defence City incentives.
As Ruslan Melnychenko, head of the legal department of the Aerospace Association of Ukraine, noted, the proposed package of changes is the result of an analysis of the practical application of current legislation and feedback from defense industry enterprises and related fields.
We proceeded from the fact that Defence City should become a really working tool, and not a formal regime with excessive restrictions. Today, some of the requirements actually make it impossible for a significant number of enterprises that are already working for defense or can quickly join it to participate
According to him, it is critically important to ensure the flexibility of rules and the predictability of the regulatory environment. "The defense-industrial complex is an industry with long investment cycles and high risks. If the rules of the game are not adapted to realities, businesses will not be able to scale production as quickly as the state needs," said Ruslan Melnychenko.
The Aerospace Association plans to submit its developments to the Verkhovna Rada of Ukraine in the near future and expects that their proposals will form the basis for refining the legislation and will be taken into account during further changes to the Tax Code and relevant laws.
Recall
Earlier, the head of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, Danylo Hetmantsev, stated the need to soften the requirements for potential residents of Defence City. This will expand the circle of participants and stimulate the industry.
UNN previously wrote that the Aerospace Association of Ukraine is collecting proposals from companies working in the defense industry sector 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 the results of 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
Today, it becomes clear that the special regime Defence City, which provides customs and tax preferences for enterprises in the defense industry sector and related industries, is not very popular with businesses. Market representatives in comments to UNN explain that this is due to some legislative gaps that create barriers for potential residents of the special regime.
Among the main deterrents are unclear turnover requirements, which effectively limit access for small and medium-sized businesses to Defence City, as well as unclear requirements for auditing companies applying to join the special regime. In addition, experts point to the absence of symmetrical tax conditions. This refers to the fact that companies are forced to pay VAT for Ukrainian-made parts, while this tax has been canceled for imported components. The Verkhovna Rada Committee on National Security, Defense and Intelligence also already understands the need to refine the relevant legislation and is waiting for market proposals.
Another barrier, experts believe, is the overly strict rule regarding criminal proceedings. A potential resident of Defence City should not be involved in criminal cases in any way. This rule applies even to factual cases without suspicions, indictments, and verdicts. Lawyers interviewed by UNN point to a violation of the presumption of innocence.