Defence City vs Diia City: What’s the Difference and Which Regime Is for Whom

The Government of Ukraine has officially launched the special legal regime Defence City — a new model for supporting and developing the defense industry. The relevant package of decisions has already been approved, and the regime came into effect on January 5, 2026. Its goal is to create favorable conditions for scaling up the production of weapons and military technologies in Ukraine.

Let’s explore the differences between Defence City and Diia City and whether they can be combined.Defence City and Diia City are often mentioned together, as both regimes were created by the state as tools for economic development. However, their logic, target audience, and level of state involvement differ fundamentally.If we talk about Diia City, it is about business freedom (minimal state interference), a focus on private initiative, and global markets. As for Defence City, it is about partnership between the state and business with enhanced control, focusing on security, stability, and mass production in the defense industry.

Comparative table

Each regime applies its own tax models, which in practice have significant differences:

Diia City: a tax model for service and IT businesses

Exit capital tax – 9%

Diia City operates a special profit taxation regime:

• 9% is paid only when funds are withdrawn (dividends, royalties, non-core payments);
• retained earnings are not taxed until they are distributed.

This means a company can accumulate capital and invest in development or scaling without immediate tax burden. This is beneficial for high-margin companies and businesses planning controlled profit distribution.

PIT 5% + SSC based on minimum wage

For employees and gig specialists:

• 5% personal income tax (PIT) instead of the standard 18%;
• unified social contribution (SSC) is calculated only on the minimum wage, regardless of actual income.

This significantly reduces payroll tax burden. IT companies, startups, and businesses with many highly paid specialists benefit the most, and it also substantially reduces the cost of UAV production. Focus on service exports standard VAT regime applies; most IT services are exported without VAT. Diia City is ideal for exporting services, software, R&D, and digital products where the key value is human capital rather than equipment.

Defence City: a tax model for industrial and defense manufacturing

Corporate income tax – 0% or reduced

Residents of Defence City benefit from a zero or preferential corporate income tax rate within defense activities, provided they meet the regime criteria. Reinvested profits are not taxed. This allows companies to direct maximum financial resources into equipment, production lines, R&D, localization of components, etc. It is especially advantageous for capital-intensive manufacturers and businesses focused on mass production.

VAT benefits

• preferential or special VAT regime for defense products;
• accelerated VAT refunds;
• reduced risk of tax invoice blocking.

Import benefits

• exemption from import duties;
• deferral or exemption from VAT on imported equipment;
• simplified customs procedures.

These conditions significantly reduce the cost of launching or expanding production —often by tens of percent.

Risks and limitations

Each regime has its own risks and restrictions, raising additional considerations for residents:

• Defence City: high level of control, complex admission procedures, dependence on government customers.
• Diia City: lack of industrial support, no priority in public procurement.

Can the regimes be combined?

It is important to note that Defence City and Diia City regimes cannot be combined within the same legal entity. However, they can coexist within a structure of separate legal entities with clearly divided activities:

• one company operates in defense activities (Defence City);
• another focuses on IT services and development (Diia City).

These entities may have contractual relationships (licenses, R&D contracts, IP transfer, etc.). However, mixing activities within a single legal entity is not allowed, as it creates a risk of losing status in both regimes.

Common structuring models

To address this, businesses already use models such as:

• participation of both companies in a holding structure;
• shared services (accounting, HR, IT);
• licensing of developments;
• joint engineering teams (with controlled access separation).

This model is already widely adopted by miltech companies (drones, electronic warfare systems, control systems).

What to expect next

In the medium term, the state may formalize mechanisms for combining the regimes, allow simplified transitions between them, or introduce special rules for dual-use businesses. As we can see, combining the regimes is possible—but only under certain conditions: through separate legal entities, with clear functional separation and heightened compliance control.

Conclusion

Defence City and Diia City are not competitors but two distinct instruments of state economic policy, each operating in its own niche.

Role of audit

In the context of launching the Defence City regime, audit plays a crucial role as a tool for confirming the correct application of tax and regulatory benefits. AC Crowe Ukraine provides a full range of audit services for defense and technology companies, including financial, tax, and compliance audits, as well as pre-audit services before entering the Defence City regime.

Conducting audits allows companies to:

• identify risks in a timely manner;
• ensure clear separation between defense and non-defense activities;
• confirm the legality of using benefits;
• prepare for government inspections, public contracts, and attracting investments.

Combined with advisory support, audit becomes a key element of stable and transparent business development within both Defence City and Diia City regimes.