UNBA warns of extreme financial risks for defense industry companies

The lack of transparent control over the activities of the Ministry of Defense as a regulator, as well as excessive sanctions for leaving the Defense City regime, create risks for defense enterprises that could lead to their bankruptcy.

The Committee on customs and tax law of the Ukrainian National Bar Association has reviewed draft law No. 13420 of 25 June 2025 «On amendments to the Tax Code of Ukraine and other laws of Ukraine on support for enterprises in the Defense Industry», which was recently adopted by the Verkhovna Rada as a basis for further consideration.

The bill proposes the creation of an «ecosystem» to support defense enterprises, combining tax preferences, administrative advantages, and a special confidentiality regime. This model is based on the formation of a list of defense industry enterprises by the Ministry of Defense of Ukraine. Inclusion in this list grants the enterprise the status of a Defense City resident with certain privileges.

In particular, the tax component of the regime provides for the complete exemption of residents from four main taxes: corporate income tax (subject to reinvestment), land tax, property tax, and environmental tax. Administrative advantages include simplified export procedures for military technologies, special licensing conditions, and the possibility of state support for the relocation of production facilities.

This regime will remain in force until 2036, providing sufficient planning horizon for serious capital investments and long-term investment projects.

At the same time, the UNBA points out that the lack of effective control over decisions to include or exclude companies from the regime may lead to subjectivity and abuse. This is particularly true in situations where decisions are made on the basis of borderline criteria or in conditions of ambiguous interpretation of legislative requirements. Without external oversight by independent bodies, such decisions may be motivated by more than just economic considerations.

The most problematic aspect is the mechanism for authorizing exit from the regime. In the event of exclusion from the List of DPI enterprises or violation of the conditions of the regime, the enterprise will be obliged to reimburse all tax benefits received for the entire period of their use, with the addition of penalties and interest. At the same time, the draft law explicitly states that the limitation periods established by the Tax Code do not apply.

This approach creates extreme financial risks for participants. After all, an enterprise that has enjoyed benefits for several years may be faced with the need to pay an amount that is several times its annual turnover at once. In effect, this means that a mistake in interpreting the criteria for the regime or a change in circumstances could lead to bankruptcy even for a successful and conscientious business.

Under such conditions, the Ministry of Defense will in fact perform not only executive but also quasi-judicial functions, making decisions that could have disastrous financial consequences for enterprises. And secrecy could be used as a tool to avoid responsibility.

Although the draft law provides for the possibility of judicial review of decisions to refuse inclusion in or exclusion from the list, the effectiveness of such a mechanism is questionable given the secrecy surrounding the criteria and procedures. Companies may not be able to compare their performance with other residents of the regime, making it difficult to prepare well-founded complaints. Limited access to information about the grounds for decisions could turn court proceedings into a formality.

There is also a risk that state secrecy will be used as a blanket argument against the disclosure of any information relating to the regime. This could prevent disputes from being fairly heard in court.

The full proposals and comments of the Ukrainian National Bar Association on draft law No. 13420 can be found at link.