Defence City: a filter for integrity or a tool to block the development of the defense industry?
Kyiv • UNN
A special legal regime, Defence City, has been launched in Ukraine to scale up defense production. However, the requirements for residents, particularly regarding the absence of criminal proceedings, raise questions and may hinder the industry's development.
The special legal regime Defence City, positioned as a tool for scaling up defense production, has officially launched in Ukraine. The first company has already received residency. However, at the start of the special regime's operation, a question arose: are there mechanisms embedded in its model that could hinder, rather than stimulate, the industry's development? UNN investigated this issue.
Requirements for residents
Defence City 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 up 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 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's operation; 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 entity.
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 one that has violated the requirements for disclosing information about its 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 if sanctions have been applied against it, or if it is associated with a person against whom sanctions have been applied.
Legal entities against which a violation of obligations under a state contract for defense procurement was established within the last 12 months, or which 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, or if it is involved in criminal proceedings.
The last point, according to market representatives, is the most controversial and effectively makes it impossible for most defense enterprises to join Defence City.
An open proceeding does not mean proven guilt
According to Volodymyr Semenov, CEO of the Aerospace Association of Ukraine, the requirement for the absence of criminal proceedings itself does not take into account modern Ukrainian realities.
It seems we know few companies that are either completely new or have no criminal proceedings. As soon as you cross a certain threshold, I mean the company's income, expect visits immediately.
According to him, today any business can find itself in a situation where criminal proceedings are opened against it. However, he emphasizes that an open criminal case does not yet mean that the enterprise's guilt has been proven. According to Semenov, the norm regarding existing criminal proceedings should be clarified, stating that there must be a conviction.
Since these cases drag on for years in our country, I mean, this is precisely a deterrent to working on this matter. I also don't understand why this norm was introduced.
In his opinion, the problem lies in the actual absence of the presumption of innocence for businesses until a conviction. In conditions where criminal proceedings can remain at the pre-trial investigation stage for years, the very fact of their initiation becomes a risk of losing or not obtaining strategic status.
In practice, this means limiting access to Defence City immediately after the initiation of criminal proceedings, as well as significant investigation periods, and thus prolonged blocking of potential residency.
Why only one resident?
Currently, only one company has become a resident of Defence City – the manufacturer of "Vampire" and "Shrike" drones and interceptors of Russian UAVs. Such a long entry process into Defence City raises questions about barriers.
According to Volodymyr Semenov, CEO of the Aerospace Association of Ukraine, in addition to the norm on criminal proceedings, there are other "pitfalls."
In particular, the procedure for verifying companies applying for resident status is not fully clear. Before submitting an application, an audit must be passed, but the procedure for passing it and the evaluation criteria are not clear.
In addition, previously, aviation and defense sector enterprises had already been included in the registers of the Ministry of Strategic Industries. Now, an additional filter is effectively being created, which duplicates existing verification mechanisms, only complicating the procedure and making it longer.
Strategic enterprises outside the regime?
It should be noted that Ukraine's defense industry traditionally operates under increased scrutiny from law enforcement agencies, especially now during the war. This is due to the volume of contracts, state orders, and export control.
Of course, control is needed, and of course, a company guilty of any machinations or violations cannot use the special regime. However, this guilt must be proven in court, because in Ukraine, as in any democratic state, the presumption of innocence applies.
Therefore, the question logically arises: are companies that are actually the backbone of the defense-industrial complex not excluded from the special regime merely due to procedural status without a court verdict?
And will the existence of criminal proceedings against defense enterprises not become a subject of bargaining with law enforcement officers: when ransoms will be demanded for the enterprise to be able to join Defence City?
In its current configuration, Defence City obviously risks becoming not a scaling platform, but a regime with a limited circle of "admitted" entities. And it risks giving unscrupulous law enforcement officers additional leverage to pressure businesses.