The idea is good, but the implementation...? Gunsmiths spoke about the biggest reform of weapons production Defence City

Deputies are about to vote on the Defence City bills, which will create a special legal regime and provide a number of preferences to Ukrainian arms manufacturers: tax breaks, simplified customs rules, a relocation mechanism, open access to the global market, restrictions on the publication of sensitive data about defense companies, and exemption from liability for certain types of offenses.

This is, without exaggeration, the main "bureaucratic" event of the year in the defense industry, because in the 12th year of the war, Ukrainian arms companies will finally be recognized as strategic not in words, but at the level of law.

Oboronka wrote more about the discussion around Defence City in a separate article. Now the deputies have made significant amendments and prepared the law for the second reading. The vote is due to take place in August.

The law is quite thorough, the industry is specific, and the initiative itself is a large interweaving of interests of various business circles. Therefore, it was not without controversy and discussion.

On the eve of the vote, three major Ukrainian associations, which unite almost the entire Ukrainian private arms market, expressed their opinions on the new regime, especially for Defense. They said that the upcoming laws spell out well, and what was done badly and that this should be changed before the second reading.

Many suggestions from gunsmiths have been taken into account in Defence City, but problems remain

Valentyna Vedrovska, Head of the GR Department of the "Ukrainian Council of Arms Manufacturers" (over 270 defense companies):

In early July, manufacturers were effectively confronted with the fact when they first saw the Defence City project. This caused a wave of indignation, as many saw an attempt to create a "club for the chosen ones". Such an approach contradicts the principle always advocated by the Ukrainian Council of Gunsmiths: "Nothing for gunsmiths without gunsmiths."

However, further communication changed the situation. A meeting between MP Danylo Getmantsev and the Council of Gunsmiths took place, and we had the opportunity to express our position, work on it and submit amendments. The transformation of the draft law text during this time is colossal. It is noticeable that the discussions and proposals of manufacturers were not in vain.

Among the key problems of the first edition was the introduction of all amendments to the Tax Code and other acts without creating a separate legal block. This created risks of misinterpretation and did not provide a comprehensive vision. In the second reading, a separate section was allocated for Defence City in the Law "On National Security".

Also succeeded:

• instead of a simple list, provide for the creation of a full-fledged Register;
• reduce the "defense" income threshold for receiving benefits from 90% to 75% (50% for aircraft manufacturing);
• expand the list of defense products;
• clearly define what is considered qualified income;
• make relocation a voluntary option, not a mandatory requirement;
• abolish the requirement to pay taxes retroactively after leaving the regime;
• maintain important data protection regulations.

The issue of simultaneous residence in the Diia.City and Defence City regimes remains problematic. Formally, this is allowed, but with a major limitation: residents of Diia.City do not have the right to use the tax benefits of Defence City. This is a one-sided norm that does not work in favor of manufacturers. In our opinion, companies should have a choice - which regime's tax benefits to use, while remaining residents of both.

The qualifying income threshold could be lowered further to make the regime accessible to more companies operating in the defense sector. Separately, we advocate expanding the list of goods subject to the entry conditions, in particular to include communications and optics.

We call on state authorities – both executive and legislative – to discuss all initiatives with the manufacturers they directly affect. The Council of Gunsmiths has a strong working group of lawyers and experts from enterprises, ready not only to criticize, but also to offer ready-made solutions.

Regarding Defence City, our main wish is to avoid making more extraneous amendments to draft laws, especially those relating to other areas (as has already happened with the Tax Code). A clear principle should apply: "One draft law - one topic."

And most importantly, implementation. The vote in parliament will be an important stage, but even more significant will be the bylaws that will regulate the launch of the Defence City regime. The main work here will fall to the Ministry of Defence. We hope that the ministry will continue to systematically interact with manufacturers and develop regulations as efficiently and transparently as possible.

Defence City is a club of the chosen ones, not equal rules for all

Serhiy Goncharov, Executive Director of NAUDI (over 100 defense companies):

The emergence of Defence City is timely and long-awaited, because in wartime, the development of defense industries goes beyond the economic category - it is a factor in preserving independence and national stability. The very fact of the emergence of such an initiative was positively perceived by representatives of the defense-industrial complex, associations and the public, since for the first time in three years of full-scale war, people's deputies demonstrated their readiness to systematically support the domestic defense industry.

At the same time, companies, specialized associations and the public, while supporting the very concept of Defence City, expressed justified criticism of individual draft laws. First of all, this concerns the proposed model for forming the register of Defence City participants, which creates risks of limited access and may leave a significant number of enterprises outside the system. This means that a significant part of Ukrainian defense manufacturers may end up outside the borders of Defence City, which contradicts the basic idea - the development of the defense industry.

We assumed that after high-quality expert revision before the second reading, this initiative could become a strategic tool for strengthening the state's defense capabilities. After all, Defence City is not about attempts to avoid responsibility, but about investing in the security and stability of the state. It is critically important to ensure equal access rules for all strategically important enterprises - regardless of size, form of ownership or volume of production.

The National Association of the Defense Industry of Ukraine has repeatedly participated in the expert development of this initiative, proposing to expand the involvement of defense industry enterprises in the new legal regime and increase the transparency of the mechanisms. Unfortunately, these proposals were not heard by the initiators.

It was also important to remove uncertainty regarding the coexistence of Defence City with the legal regime of Action.City, as duplication or contradictions in law enforcement could create new barriers for businesses.

Some of the issues, in particular regarding coordination with Diia.City, were indeed resolved during the preparation of the draft law for the second reading. At the same time, the most important NAUDI comments related to restrictions for defense industry enterprises upon entry into Defence City remained virtually at the same level. The changes affected only the percentage ratios, but the problem of access itself was not resolved. This means that the risks of creating an overly narrow register of "selected" enterprises still persist.

Enterprises that are not on the list will be forced to work in worse conditions: without tax incentives, under greater pressure, with more expensive production and weaker market positions. As a result, this does not contribute to the development of the industry, but, on the contrary, harms it. The law should work not for "selected" enterprises, but for the common goal - a strong defense industry of Ukraine.

In Ukraine, there is already a list of critical enterprises to meet the needs of the Armed Forces of Ukraine, which is formed by the central executive authorities - it should be the foundation and object of protection and assistance of the Defence City legal regime.

No more creating new registers, lists of the most important enterprises, and coming up with thousands of different criteria - it's time to support existing enterprises critical to the defense industry.

We urge the parliament not to adopt the draft laws in their current form, but to return them to the main committee for revision with subsequent submission for a second reading, eliminating the restrictive norm and allowing all critically important enterprises to enter Defence City.

Arms exports remain restricted

Kateryna Mykhalko, Executive Director of "Technological Forces of Ukraine" (80 defense companies):

Technological Forces of Ukraine (TFU) was involved in the work on the draft laws and had a meeting with their authors. Together with the members of the association, we developed an advocacy position and a number of amendments for the second reading, most of which were taken into account, for which we are grateful to the relevant committee of the Verkhovna Rada.

We at TSU saw many challenges and concerns in the Defence City concept presented for the first reading. In particular, the criteria by which enterprises can be included and excluded from the List, the conflict of tax regimes of Defence City and Diia.City, the very urgent need to protect information and data about manufacturers, the issue of the use of profits, and a number of other issues.

We paid special attention to the part about exports: the TSU advocated expanding the possibility of exports for dual-use goods and proposed removing restrictions on interagency agreements. Most of the proposals were taken into account.

We expect a vote on the draft laws as a whole and are ready to actively cooperate with the ministry on regulatory acts of their level for a faster launch of the Defence City regime and the implementation of the Build with Ukraine project, initiated by the President of Ukraine. The main thing is that the new legislative initiative lays the foundation for exports, integration of innovations, and localization of production.

At the same time, the issue of the (im)possibility of fully combining the two special tax regimes of Defence City and Diia City remains acute, as now manufacturing companies need to decide internally and organizationally how their production processes and projects will be structured, in particular, to determine under which tax regime they will operate.

The initial text did not provide for the combination of regimes, but a compromise solution was adopted for the final vote: companies can be residents of Diya.City and Defence City at the same time. At the same time, when acquiring the status of a Defence City resident, they lose key tax benefits of Diia.City – a reduced personal income tax rate, payment of SSC from the minimum wage, as well as a special income tax regime. Formally, dual residency is allowed, but without Diia.City tax bonuses.

This complicates the work of manufacturers: it is necessary to separate production and accounting between regimes, maintain dual reporting processes, build complex schemes for personnel and contract management. As a result, additional administrative and financial burden arises for manufacturers.

The committee and the people's deputies proposed a "compromise" version that would allow combining the two regimes, but with a number of features and restrictions, the decision on which would fall to the producers themselves.

I would like to draw attention to an important aspect for manufacturers, which we have been working on for two years now – arms manufacturers need full access to international markets and the ability to export surplus, i.e. products not contracted by the state, to partner countries. This is a key necessity for the integration of the Ukrainian defense industry into international supply chains.

Currently, the procedure through the DSEC is formally maintained, but in fact permits are almost never issued. In turn, Defence City offers another mechanism - the possibility of export for companies included in the list and operating within the framework of intergovernmental agreements and the Build with Ukraine initiative.

Thus, these are rather different options: one exists formally, but is difficult to implement in practice, the other provides new opportunities, but with additional access conditions.

And of course, the draft law that will be adopted by the people's deputies as a whole must comply with the norms of anti-corruption legislation and have appropriate safeguards. We plan to advocate a number of other proposals in the process of further work with the Ministry of Defense of Ukraine.

The Defence City concept is not 100% perfect, but it is in fact the first systematic attempt to create a basis for the sustainability of the defence industry sector and the long-term strengthening of the country's defence capability. We welcome this decision and offer support to the state in this.