Legislation regarding the requirements for potential residents of the Defence City special regime, which is designed to create favorable conditions for the development and scaling of defense production, needs to be simplified. This opinion was expressed in an exclusive comment to UNN by Hennadiy Kasai, a member of the Verkhovna Rada of Ukraine Committee on National Security, Defense, and Intelligence.
Context
As UNN previously reported, representatives of the defense industry market note that the current legislation regarding Defence City has some contradictions and does not take into account current realities, which significantly complicates the accession of enterprises to the special regime.
This includes, in particular, the requirement for an audit without specifying the period for which it should be conducted or by whom. In addition, the turnover amount for potential Defence City residents needs clarification so that small and medium-sized manufacturers can join the special regime.
The norm that stipulates the absence of criminal proceedings in which a potential resident would be involved also needs clarification. This point, according to market players, does not correspond to modern realities, where criminal proceedings are used as a tool of pressure on business and are not always justified.
Unfortunately, the practice of opening criminal cases 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 criminal proceedings as an element of pressure on business.
Another point that could significantly support the domestic defense industry is the abolition of VAT on Ukrainian-made components, as is done for imported parts.
Details
"I believe that all this (legislation regarding Defence City - ed.) needs to be simplified. I know that the law has gradually started working, but there are issues... Simplify it, because it is absolutely wrong to do so in terms of criminal cases (the requirement for the absence of criminal proceedings involving potential residents - ed.), because indeed, criminal proceedings are opened very easily in our country. Unfortunately, there is little accountability. And enterprises must work today. They need to be supported," said Hennadiy Kasai.
According to him, so far, no players in the defense industry market have approached him with relevant initiatives, but in the event of such an initiative, the MP stated that he is ready to support it.
Recall
The Defence City special regime 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 defense production, attracting investments, and developing the Ukrainian defense industry.
Defence City residents receive a complex of economic and operational incentives designed to reduce the fiscal burden and accelerate production development. This includes, in particular, 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 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.