The rules of operation of the regime are set out in draft laws No. 13420, No. 13421, No. 13422, No. 13423. On August 21, the Verkhovna Rada of Ukraine adopted in the second reading and in total two revised draft laws on the special tax regime for Ukrainian defense enterprises Defence City.
Who can become a resident of Defence City?
Regime residents, as indicated above, will be chosen by the authorities. Any defense manufacturer will be able to submit an application, but officials will decide whether it will be included in the Ministry of Defense register.
One of the requirements for manufacturers is that at least 90% of the company’s income for the previous calendar year be generated by the sale of its own products.
Currently, the draft laws state that an enterprise cannot become a resident of Defence City if there is a delay in delivery of more than 60 calendar days due to the fault of the contractor.
And, if you believe what is written in the draft laws, the path to the new tax regime is closed to those companies that have joined a similar initiative for high-tech companies, «Diya.City.»
Questions and complaints about the initiative
Decriminalization of violations is not the only point that has questions. For example, the Public Anti-Corruption Council under the Ministry of Defense published a whole list of reasoned claims to the conditions of Defence City.
Firstly, the City Council believes that the proposed Defence City model looks like it will operate in manual mode with limited access. This creates corruption risks.
Secondly, one of the norms proposed by the draft laws stipulates that an enterprise cannot become a resident of Defence City if there was a delay in delivery of more than 60 calendar days due to the fault of the contractor. «This violation can be confirmed both by a court and by a letter from the state customer, or even by a statement from the company itself. Such a vague formula — „either-or“ — opens up significant space for subjective interpretation and corruption abuses. Especially in wartime, when logistics are disrupted, warehouses and production facilities are under fire. Because of this, precisely those enterprises that are actually working, but for various reasons are not „convenient“ for individual officials, may be under threat. This increases corruption risks and makes equal competition impossible — especially for those who are already pressured through searches, inspections or in other ways,» the Public Council of the Ministry of Defence argues.
Thirdly, a separate provision of the bill stipulates that enterprises that are residents of «Diya.City» cannot become participants in Defence City. In practice, such a requirement excludes a large number of high-tech companies from the defence regime, in particular in the fields of UAVs, FPV, IT solutions for security and defence. «The lack of coordination between the two legal regimes creates unjustified barriers for those who have already proven their effectiveness in the production of technological solutions for the front,» the City Council of the Ministry of Defence argues.
Fourth, the requirement that at least 90% of an enterprise’s income for the previous calendar year be generated by the sale of its own products automatically excludes from the list companies that, along with their own production, are engaged in the supply or import of necessary products, in particular in the UAV and electronics segment.
Fifth, tax benefits from income tax are provided in such a way that it does not reduce, but, on the contrary, increases the complexity for the payer — both in reporting and in the risks of tax pressure: «According to the project, the payer must first submit a profit tax report in a standard form. And then — also separately report the following year on the procedure for using this profit: for expanding production, etc. The City Council proposes to completely exempt payers from income tax for the duration of the war — and tax only those funds that are withdrawn from the enterprise by the owners (according to a model similar to the PnVK — all the necessary developments already exist and have been examined by the Verkhovna Rada).
Sixth, the Public Council under the Ministry of Defense notes, the goal of the project is to use a share of additional revenues of the ATC budgets from the relocation of enterprises (the ATC’s share in the personal income tax) to ensure proper operating conditions for these enterprises. But there is one big problem. «According to the project, the enterprise first carries out the relocation. It bears all the associated costs. Including building all the necessary infrastructure at its own expense, because there are no additional revenues in the local budget at this stage. And after the relocation, the ATC will be obliged to spend half of these additional revenues on the development of the infrastructure necessary for the enterprise. This scheme does not seem to work. First of all, because of the already described reverse order of actions. In addition, in this model, it is the ATC, and not the enterprise management, that will determine what exactly the business needs,» the Public Council notes. Instead, they propose to give the enterprise the right to include the infrastructure share of relocation costs in a tax credit. And after relocation, use this loan to «pay» the corresponding portion of personal income tax.
Seventh, the draft law on amendments to the Criminal Code of Ukraine is of particular concern. The draft law provides for the exemption of officials of enterprises included in the List of the Defense Industry by the Ministry of Defense from criminal prosecution for their actions. The document will also grant the Prosecutor General exclusive powers, in particular, to enter information into the Unified Register of Pre-Trial Investigations, approve detentions, preventive measures and other procedural actions against officials included in the List of the Defense Industry. In addition, the draft law, according to the City Council, allows for the resumption of criminal prosecution of officials in the event of the exclusion of a legal entity from the List of the Defense Industry. Particularly problematic, according to activists, is the attempt to give these norms retroactive effect, which would allow them to be applied to situations that occurred before the law came into force.
The City Council called for finalizing the draft laws, «because in their current form they create more risks than benefits.»
Parliamentarians are already ready to vote on the first three bills. The vote will probably take place in the coming days. However, only three bills, and the fourth one on decriminalization, currently do not suit the lawmakers. Soon, writes «Babel» with reference to Arakhamia, an alternative bill will be registered in order to have room for maneuver and write everything correctly.
