Diia.City VS Defence.City: Which Legal Framework Should a Business Choose and What Tax Benefits Await?

On December 9th, an online meeting was held as part of ITU Legal Talks, organised by the IT Ukraine Association with the participation of legal partner — EBS. The topic of the meeting was ‘Diia.City VS Defence.City: Which Legal Framework to Choose?’.

 

 

Speakers of the event, Kateryna Harbuz, Partner, Legal Practice Leader, EBS and Iegor Sinitsyn, Partner, Tax and Transfer Pricing Practice Leader, EBS,  outlined the key features of residency in Diia.City and Defence.City, business opportunities within these legal frameworks, taxation specifics, and shared a practical guide for choosing the right framework for businesses. 

 

Among the information shared:

 

Diia.City and Defence.City are two legal frameworks created to stimulate the development of sectors crucial to the country’s economy and security. Diia.City is regulated by the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine”. Defence.City is governed by Laws No. 4577-IX and No. 4578-IX. The duration of these frameworks starts from the moment the first resident is added to the register and lasts for:

• Diia.City: 25 years;
• Defence.City: until 2036.

 

Requirements for Diia.City Residents:

• A legal entity registered in Ukraine.
• Average salary ≥ 1200 €.
• At least 9 employees or gig specialists.
• Qualified income ≥ 90% of total income.
• No anti-criteria.

 

Requirements for Defence.City Residents:

• A legal entity registered in Ukraine.
• No anti-criteria.
• Qualified income share:
  • ≥ 50% for aircraft manufacturers. ≥ 75% for other companies.  

Qualified income in Diia.City includes revenue from the sale of goods or services as defined by law. In Defence.City, this income is defined more narrowly: it includes income from the sale of defense products, services related to the manufacture, repair, and modernisation of defense equipment.

 

Anti-criteria for both frameworks include, among others, outstanding tax liabilities, non-profit status, undisclosed ownership structure, or information on KBU (Beneficial Ownership Information), etc.

 

Process for Obtaining Diia.City Residency Status:

• Submit an application through the “Diia” portal to the Ministry of Digital Transformation.
• The application must include data about the legal entity, employees, and types of activities.

 

Process for Obtaining Defence.City Residency Status:

• Submit an application to the Ministry of Defense of Ukraine.
• Required documents include information about qualified income, types of activities, and documents confirming compliance with the requirements. Residency may be revoked under certain conditions: failure to meet legal requirements, missed reporting deadlines, or the enactment of a court decision. In Defence.City, there are also special grounds such as the misuse of profit or violation of state contracts.

 

One of the main reasons for choosing between Diia.City and Defence.City is the tax benefits. Diia.City offers preferential taxation for salaries and remuneration, as well as a special taxation system for PNVK. Defence.City offers similar benefits, but with significant specifics for this framework, including incentives for reinvestments. However, salary taxation remains under the standard conditions. Meanwhile, Defence.City provides preferential conditions for land tax and property tax.

 

Both frameworks involve certain controls over residents. For Diia.City, reporting is submitted to the Ministry of Digital Transformation, while for Defence.City, it is submitted to the Ministry of Defense. In both cases, reports must be submitted annually to ensure compliance with the requirements.

 

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