Defence Meet-Up in Lviv: Defence City Tax Regime and M&A as Tools for Transforming the Defence Business

02/ 03/ 2026

Listen to online Stop   The Defence Meet-Up in Lviv brought together representatives of the defence industry, investors, and advisors to address a key question: how the economic and legal logic of Ukrainian DefTech companies is changing following the launch of the Defence City regime, and what role M&A transactions play in this transformation. The event had a distinctly pragmatic focus. Participants discussed real regulatory frameworks, tax conditions, constraints, and growth scenarios for companies operating in the defence sector. Defence City: a regime of accountability, not tax simplification . Defence City is a special legal regime introduced under two core Ukrainian laws and implemented through the Cabinet of Ministers’ resolutions. Its duration is limited until 1 January 2036, starting from the date when the first resident is entered into the register. This means that businesses should view Defence City as a temporary sector-specific model with a defined planning horizon, rather than a permanent tax architecture.  Qualified income as the foundation of residency. A central feature of Defence City is the share of qualified income within a company’s total revenue structure, which is at least 75% for most legal entities and at least 50% for aircraft manufacturing entities. Qualified income includes revenue from the production and sale of defence products; performance of work and services related to development, modernization, repair, and disposal; participation in state defence contracts (including as a subcontractor); and targeted charitable assistance that is actually used within the production cycle. Key practical takeaway: Formal business activity codes are not decisive. What matters is the economic substance of revenue streams, the contractual model, and the actual use of funds, Kateryna Harbuz, Partner and Head of Legal Practice, EBS.  Defence products: a narrow and exhaustive definition. Particular attention was paid to the concept of defence products, which differs from dual-use or broadly defined defence-related goods. Defence products include only weapons, ammunition, military and special equipment, and arms. The list is exhaustive. For dual-use companies, this creates additional legal risks and requires a preliminary legal analysis of the product portfolio before applying for residency.  Defence City as a selection regime. The Defence City regime operates as a negative regulatory filter. A company cannot become a resident if it has tax debts, unpaid social contributions, issues with beneficial ownership disclosure, a history of breaches of state contracts, or connections to sanctioned persons or FATF-listed jurisdictions.  In practice, this amounts to a preliminary state-level audit of the business before entry into the regime. Tax incentives: deferred taxation under enhanced oversight. Defence City provides exemptions from corporate income tax, land tax, property tax, and environmental tax. However, the exemption from corporate income tax is conditional. Profits must be reinvested in legally defined areas by 31 December of the year following the reporting year. Dividend distributions are restricted. Breaches of these conditions trigger additional tax assessments at an 18% rate, penalties, and the risk of losing resident status. In essence, Defence City represents a model of deferred taxation under heightened state supervision, rather than a traditional tax incentive.  Key differences between Defence City and Diia City. During the Defence Meet-Up, Yehor Synytsyn, Partner and Head of Tax Practice at EBS, highlighted the fundamental differences in the economic logic of Defence City and Diia City, which are often mistakenly perceived as interchangeable. Although a Defence City resident may simultaneously hold Diia City status, doing so results in the loss of tax incentives under both regimes. Therefore, choosing a regime is a strategic decision rather than a purely technical one. M&A as a strategic tool in the DefTech sector . A separate session of the Defence Meet-Up focused on M&A and inorganic growth for defence companies. Participants emphasized that in wartime conditions, with limited access to capital and long development cycles, organic growth is often insufficient. In this context, M&A is seen as a way to quickly consolidate production and technological assets, gain access to unique competencies and R&D, and enter international markets through strategic partners in the US and EU. “For European partners, Ukrainian manufacturers represent a country of resilient people, a platform for testing new technologies, and the eastern flank. The DefTech sector currently offers strong prospects for M&A transactions. Businesses should therefore build long-term strategies now, actively seek new markets, and collaborate with advisors on buying or selling equity stakes,” said Artem Myrhorodskyi, Investment Director for DefTech at Mergewave Capital. M&A within Defence City: new variables in transactions. M&A transactions in the DefTech sector must account for the specifics of the Defence City regime. Asset valuation is no longer based solely on financial performance. Critical factors include compliance with Defence City requirements, revenue structure and qualification, sanctions and tax integrity, and readiness for enhanced post-transaction audits. Dividend restrictions and reinvestment requirements directly affect return-on-investment models and exit timelines for investors. Practical takeaway for the market . For some businesses, Defence City is not an end goal but a platform for preparing strategic partnerships, industry consolidation, and partial sales to international players. For more established companies, Defence City becomes not only a tax regime but also a platform for institutional development, investment, and M&A-driven transformation within the defence sector. M&A is increasingly becoming not an auxiliary tool but a systemic element of strategy for DefTech companies.

The Defence Meet-Up in Lviv brought together representatives of the defence industry, investors, and advisors to address a key question: how the economic and legal logic of Ukrainian DefTech companies is changing following the launch of the Defence City regime, and what role M&A transactions play in this transformation.

The event had a distinctly pragmatic focus. Participants discussed real regulatory frameworks, tax conditions, constraints, and growth scenarios for companies operating in the defence sector.

Defence City: a regime of accountability, not tax simplification 

Defence City is a special legal regime introduced under two core Ukrainian laws and implemented through the Cabinet of Ministers’ resolutions. Its duration is limited until 1 January 2036, starting from the date when the first resident is entered into the register. This means that businesses should view Defence City as a temporary sector-specific model with a defined planning horizon, rather than a permanent tax architecture. 

Qualified income as the foundation of residency

A central feature of Defence City is the share of qualified income within a company’s total revenue structure, which is at least 75% for most legal entities and at least 50% for aircraft manufacturing entities.

Qualified income includes revenue from the production and sale of defence products; performance of work and services related to development, modernization, repair, and disposal; participation in state defence contracts (including as a subcontractor); and targeted charitable assistance that is actually used within the production cycle.

“Key practical takeaway: Formal business activity codes are not decisive. What matters is the economic substance of revenue streams, the contractual model, and the actual use of funds”, Kateryna Harbuz, Partner and Head of Legal Practice, EBS. 

Defence products: a narrow and exhaustive definition

Particular attention was paid to the concept of defence products, which differs from dual-use or broadly defined defence-related goods.

Defence products include only weapons, ammunition, military and special equipment, and arms. The list is exhaustive. For dual-use companies, this creates additional legal risks and requires a preliminary legal analysis of the product portfolio before applying for residency. 

Defence City as a selection regime

The Defence City regime operates as a negative regulatory filter. A company cannot become a resident if it has tax debts, unpaid social contributions, issues with beneficial ownership disclosure, a history of breaches of state contracts, or connections to sanctioned persons or FATF-listed jurisdictions. 

In practice, this amounts to a preliminary state-level audit of the business before entry into the regime.

Tax incentives: deferred taxation under enhanced oversight

Defence City provides exemptions from corporate income tax, land tax, property tax, and environmental tax. However, the exemption from corporate income tax is conditional.

Profits must be reinvested in legally defined areas by 31 December of the year following the reporting year. Dividend distributions are restricted. Breaches of these conditions trigger additional tax assessments at an 18% rate, penalties, and the risk of losing resident status.

In essence, Defence City represents a model of deferred taxation under heightened state supervision, rather than a traditional tax incentive. 

Key differences between Defence City and Diia City

During the Defence Meet-Up, Yehor Synytsyn, Partner and Head of Tax Practice at EBS, highlighted the fundamental differences in the economic logic of Defence City and Diia City, which are often mistakenly perceived as interchangeable.

Although a Defence City resident may simultaneously hold Diia City status, doing so results in the loss of tax incentives under both regimes. Therefore, choosing a regime is a strategic decision rather than a purely technical one.

M&A as a strategic tool in the DefTech sector 

A separate session of the Defence Meet-Up focused on M&A and inorganic growth for defence companies. Participants emphasized that in wartime conditions, with limited access to capital and long development cycles, organic growth is often insufficient.

In this context, M&A is seen as a way to quickly consolidate production and technological assets, gain access to unique competencies and R&D, and enter international markets through strategic partners in the US and EU.

“For European partners, Ukrainian manufacturers represent a country of resilient people, a platform for testing new technologies, and the eastern flank. The DefTech sector currently offers strong prospects for M&A transactions. Businesses should therefore build long-term strategies now, actively seek new markets, and collaborate with advisors on buying or selling equity stakes,” said Artem Myrhorodskyi, Investment Director for DefTech at Mergewave Capital.

M&A within Defence City: new variables in transactions

M&A transactions in the DefTech sector must account for the specifics of the Defence City regime. Asset valuation is no longer based solely on financial performance. Critical factors include compliance with Defence City requirements, revenue structure and qualification, sanctions and tax integrity, and readiness for enhanced post-transaction audits.

Dividend restrictions and reinvestment requirements directly affect return-on-investment models and exit timelines for investors.

Practical takeaway for the market 

For some businesses, Defence City is not an end goal but a platform for preparing strategic partnerships, industry consolidation, and partial sales to international players.

For more established companies, Defence City becomes not only a tax regime but also a platform for institutional development, investment, and M&A-driven transformation within the defence sector. M&A is increasingly becoming not an auxiliary tool but a systemic element of strategy for DefTech companies.