Benefits, taxes and control of the Defense Ministry: what awaits arms manufacturers
28 August 18:34
The Defence City special regime will be available for weapons manufacturers, which will allow them to produce and supply weapons to the Armed Forces of Ukraine faster. In the second reading, the Verkhovna Rada adopted draft laws No. 13420 and No. 13421, which form the basis of the Defence City package, a government initiative to support the Ukrainian defense industry. But, as usual, there was a fly in the ointment. What did the parliamentarians overlook?
The Defence City legal regime will be in effect until January 1, 2036, and will provide manufacturers with the following benefits:
- Exemption from income tax, land tax, and real estate tax (if used in production), as well as from environmental tax.
- Simplified customs procedures and export controls.
- Special conditions for currency supervision and operations from the NBU.
- Support for the relocation and security of production facilities.
The documents provide for the creation of a Defence City Resident Register to be maintained by the Ministry of Defense. Participants will be able to obtain a special status provided that the share of their qualified income is at least 75% of the total (for aircraft construction – at least 50%).
According to Defense Minister Denys Shmyhal, the launch of Defence City will significantly increase the production of modern Ukrainian weapons and military equipment, develop the latest technologies, attract investment in the industry and enhance the capabilities of the Defense Forces.
“Participation in Defence City is open to companies that are strategically important for the country’s defense capability, meet the requirements of transparency and other criteria. Our key goal is to fully provide the Defense Forces with everything they need, develop and improve their own weapons and equipment, and ensure the security of the state in the future through a strong, capable army,” the minister said.
A law for selected companies
The first to sound the alarm were representatives of the defense industry, who have been working in this market for many years and know the inside scoop. The National Association of the Defense Industry of Ukraine (NAUDI), which unites more than 100 leading defense companies, noted that in its current form, the program will support only selected companies and actually puts the industry in an unequal position.
NAUDI companies supported the legislative initiatives by providing a number of comments in the hope that lawmakers would hear the industry’s position. But despite numerous recommendations, restrictions on entry for defense companies remained unchanged.
“The current model of inclusion in the Defence City register looks like it will work in a limited, selective mode and is created only for “selected” enterprises. According to NAUDI’s analysis, a significant number of effective and critical defense companies will not be included in the list of Defence City residents.
The current version of the draft law will not allow enterprises with 100% of their activities directly aimed at meeting the needs of the Ukrainian Defense Forces – enterprises that have already been recognized as strategic,” said Pashynskyi, the head of the association.
It follows that companies that are not on the list will be forced to operate in worse conditions: without tax incentives, under greater pressure, with more expensive production and weaker market positions.
“This is not only not conducive to the development of the industry, but on the contrary, it harms it. The law should work not for “selected” enterprises, but to strengthen the entire defense industry of Ukraine,” the association emphasized.
The main problem is that the criterion of 75% fulfillment of state contracts actually “cuts off” many small producers and newly established companies. After all, most of them do not work directly with the state, but with funds and other sources of funding.
Everything under the control of the Defense Ministry is a path to corruption
MP Dmytro Razumkov generally noted that despite the good idea, Defence City risks becoming a “feeder” for the Ministry of Defense. In his opinion, huge levers of influence, including corruption, remain in the hands of the Ministry of Defense.
“The Verkhovna Rada has passed laws on Defense City, a special preferential regime for defense companies. It sounds right and promising, but there is one big problem and threat: huge levers of influence, including corruption, remain in the hands of the Ministry of Defense. It is the same ministry that purchased eggs for 17 hryvnias, “winter” jackets that turned out to be summer jackets, and defective mines. And it is this ministry that is given full control over defense enterprises. It is instructed to perform the function of controlling, which completely destroys the good idea that was originally laid down in this bill,” the MP believes.
The second problem is the ban on the export of “surplus” defense products, Razumkov believes. If the state purchases only a part of the possible volume, why prohibit the sale of the rest (except to Russia and its allies)? This creates corruption risks: “knowledgeable” representatives of the Defense Ministry offer to buy the entire batch at an inflated price, and transfer the difference “in an envelope”.
“Instead of supporting the industry, they are actually tripping up their own producers. Our companies could develop and thus increase their ability to help the Armed Forces. But the government deliberately does not allow this,” the MP emphasizes.
Everything new is long forgotten old
Military experts also note that while everything is more or less transparent with defense orders, it is not so simple with those who can count on them. It will not be easy to get on the list of the “lucky ones” who will receive an entry ticket to the register of defense companies. There is no mechanism for the criteria by which the Defense Ministry will select candidates, emphasizes military expert Oleh Zhdanov in a commentary
“This will be a Klondike for corruption, earnings on the distribution of “entrance tickets”. After all, those who are not included in the register will not receive a defense order. And the Ministry of Defense will decide this at its discretion,” believes Oleh Zhdanov.
Another nuance is that government orders will be given to companies included in the register, regardless of whether they produce high-quality products or not and at what price. At the same time, those producers who can offer better and cheaper products will be ignored, the expert notes.
“The idea is good, but not fully developed. As a result, we will come to a mess in the arms market. It will be like in 2022-2024, when at the end of the year it turned out that the Defense Ministry had not realized millions of hryvnias for procurement, and the army was left without the necessary equipment,” Zhdanov emphasizes.
“And besides, we will again come to the point where we will spend huge amounts of money on the purchase of imported weapons, while Ukrainian producers will be left without government orders.
Author: Alla Dunina
