Defense City: How did arms manufacturers respond to initiative?
Drone Industry
On August 21, the Verkhovna Rada passed in second reading and as a whole two key draft laws to implement the Defence City initiative – a special legal regime for defense industry enterprises.
Ukrainian arms manufacturers generally welcomed the adoption of the law but also voiced certain concerns, according to a Business Censor article titled Defence City: Boost for defence industry or closed club for chosen few?
Under the adopted laws, Defence City residents will receive a number of benefits, including:
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tax breaks – exemption from corporate income tax provided profits are reinvested, as well as from land, property, and environmental taxes;
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simplified customs procedures;
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simplified export controls for military-purpose goods;
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the possibility for the National Bank of Ukraine to set specific conditions for foreign exchange supervision;
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support for relocation and enhanced security of production facilities.
The idea of Defence City is to create favorable conditions for companies engaged in the production of weapons, military equipment, and related goods. The regime is being introduced to stimulate growth in a sector critical not only for Ukraine’s defense but also for its economy.
DEVIRO company, which has been developing, designing and manufacturing UAVs and related software since 2014, expressed hope that under the new "banner" the old problems, such as mobilisation exemptions, export controls and others, will not persist.
According to company representatives, the proposed tax incentives for manufacturers are not substantial enough to materially affect the economics of defense enterprises.
"Introducing such incentives is needed more by the state than by manufacturers, because exemption from these taxes "takes pressure off" the pricing of products and services," the company’s representatives say.
The Ukrainian Council of Defence Industry backed the initiative but, according to Executive Director Ihor Fedirko, the association will seek targeted improvements during implementation.
"Specifically, interoperability with Diia.City and further expansion of the list of goods where the full production cycle requires it," Fedirko said.
Serhii Honcharov, Executive Director of the National Association of Defense Industries of Ukraine (NAUDI), called the Defense City initiative timely and long-awaited. At the same time, ahead of the parliamentary vote, NAUDI urged MPs not to pass the Defense City bills in their current form and to send them back for revision.
"Above all, this concerns the proposed model for forming the register of Defense City participants, which creates risks of restricted access and could leave a significant number of enterprises outside the system. That would mean a large share of Ukrainian defense manufacturers could end up outside Defense City, which runs counter to the core idea, developing the defense industry," Honcharov explained, adding that Defense City should be an effective mechanism for the entire sector, not a closed club for the chosen few.
As a reminder, on July 16 the Verkhovna Rada supported at first reading draft laws No. 13420 and No. 13421 to introduce benefits for defense-industrial enterprises as part of the Defense City initiative.
Overall, the Defense City package initiated by Servant of the People MPs Danylo Hetmantsev and Davyd Arakhamiia consists of four bills: No. 13420, No. 13421, No. 13422 and No. 13423.
However, Bill No. 13423 drew sharp criticism, as it would, in effect, grant amnesty for all violations committed in the performance of defence contracts if they were "in the interests of enhancing defence capability." According to experts, this creates legal grounds for a lack of oversight and impunity in the sector.
