In January, the special regime Defence City was launched, which provides tax and customs preferences designed to increase the competitiveness of Ukrainian manufacturers operating in the defense industry complex. As Ruslan Melnychenko, head of the legal committee of the Aerospace Association of Ukraine, told UNN, the first months of the special regime's operation revealed a number of legislative gaps that need to be corrected so that as many enterprises as possible that strengthen the state's defense capabilities can access Defence City.
Complicating access to Defence City
"Defence City is designed to promote the development of enterprises operating in the defense industry, or related to it. These include aircraft manufacturing enterprises, which also fulfill defense orders. In practice, the conditions for joining the special regime turned out to be too complex. For example, in the requirements for the documentation necessary to submit an application, there are norms that directly contradict each other, and this requires clarification from the legislator," Ruslan Melnychenko told UNN.
In addition, according to him, the requirement for the absence of any open criminal proceedings significantly complicates the ability of potential residents to use the tools of the special regime.
In fact, a situation is created where a company may meet all technological, production, and financial criteria, but be denied access to Defence City due to a formal entry in the Unified Register of Pre-trial Investigations.
The requirement for a "clean history" can weed out most manufacturers
The very provision of the legislation on the absence of criminal proceedings involving enterprises caused significant concerns from the market at the very beginning of the legislation's development.
Ruslan Melnychenko, head of the legal committee of the Aerospace Association of Ukraine, is convinced that in the current Ukrainian realities, it is almost impossible to find a company that would not be involved in a criminal case in one way or another. And here, according to him, it is not only about defense or aviation enterprises.
The initiation of criminal proceedings is often used as a tool to influence business. This refers to the initiation of custom-made cases without proper evidence, delaying pre-trial investigations, blocking accounts, or seizing property to hinder the work of enterprises.
"The practice of opening criminal cases, unfortunately, often has a formal character: proceedings are registered based on statements from competitors or within the framework of inspections, after which they can 'hang' for years without active investigative actions. Often, some dishonest law enforcement officers can use the criminal process as an element of pressure on business," the lawyer explained.
In the defense industry and aircraft manufacturing sectors, such actions can have critical consequences and lead to disruptions of defense contracts, loss of foreign partners, and a decrease in export potential.
Under the current version of the requirements for Defence City residents, the mere fact of opening a proceeding is enough for a company to lose the opportunity to join the special tax and customs regime. Thus, the criminal process can turn into a mechanism for blocking access to preferences.
Under such conditions, according to Ruslan Melnychenko, the requirement for the complete absence of open proceedings automatically weeds out a significant part of potential Defence City residents, even if it concerns strategic enterprises fulfilling defense contracts.
Violation of the presumption of innocence
A separate aspect in this context is the constitutional principle of the presumption of innocence. Ruslan Melnychenko reminded that until a guilty verdict of the court enters into force, no person or company can be considered guilty of committing an offense.
"The mere fact of entering information into the ERDR, i.e., opening criminal proceedings, is not confirmation of guilt. This is only a stage of information verification. Guilt is established exclusively by the court; until a guilty verdict enters into force, a person is considered innocent," he explained.
Therefore, the requirement for the absence of open proceedings actually puts the company in the position of "potentially guilty" even before the court's decision. According to the lawyer, such a norm contradicts basic constitutional principles and creates a risk of selective application. Ultimately, this can lead to the rejection of most potential Defence City residents.
Need for legislative correction
According to Ruslan Melnychenko, a more balanced approach would be to take into account the existence of a guilty verdict of the court that has entered into legal force, and not the mere fact of opening criminal proceedings.
Such a decision would allow maintaining a filter for dishonest enterprises and would minimize the risks of abuse during the selection of future Defence City residents. In addition, this approach will significantly expand the circle of companies that can apply for state preferences.
"In wartime conditions, when the development of the defense industry and aircraft manufacturing is a matter of national security, legislative norms should stimulate, not restrict, strategic manufacturers. The market hopes that the legislator will hear us and that the procedures for joining and reviewing the admission criteria for Defence City will be promptly finalized," Ruslan Melnychenko emphasized.
Recall
In Ukraine, the special regime Defence City has started operating. 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 investments, and developing the Ukrainian defense industry.
Defence City residents receive a complex of economic and operational incentives that are designed to 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 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 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 a person.
The share of qualified income must be at least 75% of the total income of the legal entity (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 defense procurement contract was 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 enter 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.