Defense City is a special legal regime created to support defense-industrial complex enterprises. It provides tax benefits and promotes development of Ukraine’s defense industry.
Status of the Defense City resident is granted by the Ministry of Defense of Ukraine on a voluntary basis. Legal entity becomes resident after submitting relevant application and entering it into the Defense City register.
Tax benefits
Residents of Defense City are exempted from paying income tax, provided that income is used for certain legally defined purposes. Among the main areas:
- Development of resident’s own activities:
re-equipment of material and technical base,
modernization of technological and production processes,
introduction of the latest technologies,
creation of new models of weapons and military equipment.
- Acquisition of corporate rights of defense complex enterprises:
investments in capital of such enterprises if they do not pay dividends during the benefit period.
- Acquisition of intellectual property rights for execution of government contracts
These areas help to ensure development of the defense industry and allocation of income to strategically important projects.
Dividends’ payment
Defense City resident is not entitled to pay dividends from the tax-exempted income.
Dividends’ exception:
- in favor of the state;
- in favor of the state-owned enterprises and organizations, 100% of whose shares belong to the state;
- in favor of other business entities, 100% of whose shares belong to the state or enterprises with 100% state participation.
If dividends are paid to the state or state-owned enterprises for a period before acquiring resident status, advance payment is calculated and paid according to the established procedure.
After obtaining resident status and benefit period, advance payment for dividends is not paid to the state in the amount of income exempted from taxation in a period for which dividends are paid.
Investments in corporate rights
If the Defense City resident acquires corporate rights of the business entity of the defense-industrial complex, which at the time of investment or after it pays dividends to its participants, this is considered misuse of income.
Rule helps to ensure that income is directed to the development of resident's activities and the defense industry, and not to payments to shareholders.
Timely use of income
Income exempted from taxation must be used to develop activities of the Defense City resident by December 31 of year following the reporting year.
If the payer concluded contract and made advance payment by December 31 of year following the reporting year in which the corporate income tax payer acquired status of the Defense City resident, and actual supply of products or services occurred later, requirement is considered fulfilled.
Attention: if the contract is canceled or advance payment is returned, such actions will be considered a violation of the intended use of income.
Read more at the link – https://tax.gov.ua/baneryi/onlayn-navchannya/podatok-na-pributok-pidpriemstv/981629.html