Diia City vs. Diia Defence — how Ukraine's business regimes work

The creation of several special regimes for businesses in Ukraine in 2025 gave the false impression that there was a universal solution for companies operating in the technology, defense, and investment sectors. Defence City for arms manufacturers, Dіia Invest for investment funds, and the well-known Dіia City formed a complex system of incentives that many attempted to combine. However, the legislator incorporated a fundamental limitation into this model: the benefits do not accumulate. There are pros and cons to choosing a regime.

These pros and cons are discussed in an author's column by Dmytro Mikhailenko, managing partner at Crowe Mikhailenko.

Here's what you need to know about joining Defence City or Diia City

Formally, all of these regimes are voluntary. A company that meets the established requirements can submit an application and receive special status. In practice, though, the deciding factor is not the status itself but the tax and regulatory advantages that can be applied without loss. This is where the main conflict between Defence City and Diiya City arises.

Diia City was designed as a tool to optimize labor costs. It provides preferential personal income tax rates, a reduced social security contribution burden, and special corporate profit taxation rules, allowing companies to efficiently work with teams of developers, engineers, and R&D specialists.

Defence City, on the other hand, is oriented toward capital-intensive production, including land, real estate, importing components, exporting finished products, and being exempt from corporate income tax under the condition of reinvestment.

Can a company be in both Defence City and Diia City simultaneously?

Despite the absence of a direct prohibition in the Tax Code, operating in both cities does not provide businesses with a double benefit.

If a company in Dіia City receives Defence City residency status, it essentially loses the right to use the first regime's tax incentives. Therefore, attempting to take advantage of all the benefits at once will be unsuccessful because the business will lose the key advantage that prompted it to enter Dіia City in the first place.

However, another strategy emerges in practice. Rather than combining the regimes in one legal entity, it involves dividing functions between several structures.

Currently, Ukrainian law does not limit the creation of separate companies, each of which can choose its own special regime. In this model, development, software, and engineering solutions can remain in Dіia City while production, assembly, testing, and logistics are outsourced to a separate Defence City resident company.

This approach preserves benefits for personnel while obtaining advantages related to imports, land, and reinvesting profits. However, it requires a significantly higher level of legal and tax planning because any mistakes in how the structures interact may attract the attention of the controlling authorities.

For companies working with drones or dual-use products, the strategic question is not about choosing the "best" regime but rather about dividing the business correctly. After all, transitioning directly from Dіia City to Defence City almost always results in the team losing benefits. 

"Companies should plan in advance which of their activities—development, production, or service—should be transferred to a new legal entity and how they will structure their interactions," advises Dmitry Mykhailenko.

What to know about Defence City and foreign capital

The expert notes that the Dіia Invest regime, which appeared in 2025 as well, complicates the system. Formally, it is intended to stimulate investment through investment institutions.

However, most investors continue to use alternative financing tools, such as loans, options, and convertible mechanisms, in practice. The restrictions on asset composition in Diia Invest reduce its appeal for high-risk and technology-based projects, particularly in the miltech sector.

Read more:

• Foreign investment in Ukraine's defense industry surges
• Why Europe's defense industry is learning from Ukraine