Ukraine’s MPs lifting taxes for drone makers

BLUF: Ukrainian MPs expanded tax exemptions for imports on all types of drones and their components. This change may speed up military production and strengthen its armed forces. In other news: a scandal with the Defence Procurement Agency, Supervisory board, and MoD. And Ukrainian drone manufacturer Armadrone, partnered with Danish MDSI to integrate Danish high-precision ammunition into REX and PUNISHER drones.

THE BIG STORY: Ukraine ramping up drone production by expanding tax exemptions

The war has shown the growing importance of drones on the battlefield, driving government efforts to simplify their import and provide benefits to drone manufacturers. 

In late December 2024, the Ukrainian parliament amended legislation that extends tax benefits to marine and ground drones.

Expansion of benefits: What has changed in 2025?

Previously, tax exemptions only applied to aerial drones, not to ground and marine drones. 

Dozens of naval drones have attacked Russia in the Black Sea in the last 2 years, including attacks on dozens of ships, the Crimean Bridge, and recently — even helicopters. 

Marine drones effectively unblock sea lanes, forcing Russia to keep its military fleet in its home ports. Ground drones detect and destroy enemy positions and mines, delivering supplies to the front line. 

“Reflecting on three years of war in Ukraine, it's clear that this is a technological war. The government must take every possible measure to boost drone production. This will play a critical role in overwhelming Russia,” said a representative of Hard Cat marine drone manufacturer. He asked to talk anonymously for security reasons. 

In December, the Ukrainian brigade Khartiia even claimed to conduct the first-ever attack using only robotic systems.

On December 17th, the parliament passed two laws that extended tax and customs benefits to 2025. In particular, this included:

• Extension of tax benefits to components for ground and naval drones. This will lower production costs.

• Exemption from payments for customs clearance up to 10 percent and the 20 percent Value Added Tax for ammunition and shell components, speeding up production and reducing costs.

• Prolongation of import benefits covering drones and night vision equipment, anti-drone guns, thermal imagers, and other equipment, as well as powering reconnaissance and counter-drone operations.

The new amendments added the following list of components to those exempt from import duties: 

• Lead batteries;

• Semiconductor devices;

• Parts of motor devices;

• Topographic instruments; 

• Certain types of weapons (like howitzers, mortars or machine guns); and 

• Explosives.

This applies if they are used for producing air, land, and water unmanned systems, remotely controlled weapons systems, or mechanized demining vehicles. 

Custom clearance for military producers is now faster, and delivery delays are reduced, said Iryna Korzhenkova, an analyst at Center UA, a Ukrainian non-government organization promoting reforms and legal transparency. 

She also described two main changes in the law that affected the defense industry: 

• Previously, all military humanitarian aid was slowed by complex procedures. Now, it’s easier to deliver items like body armor, helmets, and night vision devices.

• Previously, legislation prioritized state enterprises that restrained military development and production. Now, the private sector can actively participate in military manufacturing.

How will it affect military production?

“Exemption from customs duties and VAT significantly reduces the production cost of ground, maritime, and aerial unmanned systems. The saved funds can be redirected toward improving existing technologies, creating innovations, and scaling up production,” mentioned Lomikovsky. 

However, it will take time to feel these changes. Although the parliament voted for import privileges on December 17th, they came into force only on December 31st — the day after Zelenskyy signed these two laws and officially published them. 

Since January, the government has had 30 days to adopt all legal acts necessary to implement this law. So, as of now, producers have not experienced any changes.

“The production speed is most important for us, and importing [complexity] causes delays, so this is the main problem. Therefore, if it is possible to import components free of duties now, it will positively impact production. But I still doubt whether it will work. The import of dual-use goods that we use for drones can lead to additional inspections, which will slow down production,” said Iurii Turok, CEO of Trident company that produces ground drones.

A Hard Cat drone developer was also unaware of such a law. Their drones mainly rely on components bought abroad, so expanding import privileges could benefit them. 

 These additional benefits will help optimize financial resources and direct them toward business development. 

However, in this context, the preferential state loan program launched by the Ministry of Strategic Industries at the end of 2024 will have a more significant impact, noted Lomikovsky. (We have previously written about this in our newsletter. You can read this here). 

Although the law will reduce the price of the final product and speed up its production, it will not directly help create new defense products, said Turok. And import benefits are no substitute for developing domestic manufacturing that can help stop capital outflow. 

Moreover, Ukraine may soon need to expand the list of preferential goods and include more components for modern technologies such as artificial intelligence or new-generation drones, added Korzhenkova.

The History of Drone Taxes and Regulation in Ukraine

Until 2022, military-purpose goods and dual-use components, which are used in drones, had no customs benefits. 

According to general rules, defense manufacturers had to pay duties plus a 20 percent VAT during customs clearance, and benefits applied only to specific equipment. Manufacturers also had to get a particular license called an end-user certificate, and prove that they will use these components as intended. 

Bureaucracy and lengthy permit processes delayed military imports, explained Center UA analyst Korzhenkova. The Ukrainian need for drones skyrocketed with the start of the full-scale invasion. So, the government began simplifying regulations on importing drones and their components. 

In March 2022, the first laws introduced tax and customs benefits for importing most goods, including drones, night vision devices, and body armor. The law also suspended most tax audits for businesses. As a result, the import of military equipment was simplified, speeding up the army's resource supply. However, this law was in effect until July 2022.

A new law exempted military goods from import duties on February 18, 2023. It was first applied only to certain goods, such as copters, thermal imagers, collimators, walkie-talkies, and night vision devices. 

In the summer of 2023, President Volodymyr Zelenskyy signed a new law. It extended these benefits to components for producing and repairing UAVs (Unmanned aerial vehicles), including materials, components, assemblies, and equipment, simplifying access to critical components during martial law.

Manufacturers welcomed the first tax and customs changes, said Lomikovsky. It boosted market growth by saving financial resources. As a result of the massive demand for drones (and such tax incentives), drone production has increased 100 times over the past two years, as noted earlier by Mykhailo Fedorov, Minister of Digital Transformation.

BUSINESS LUNCH TOPICS: What our reporting shows!

1. Drone interceptor GAARPIA is being tested on the battlefield 

Ukrainian drone producer Ukrdefence has started testing its new drone GAARPIA (Ground-to-Air Anti Reconnaissance Planes Interceptor Aircraft), in battlefield conditions. This is an anti-aircraft FPV drone that should neutralize wing-type reconnaissance drones.

The drone has these capabilities:

• Speed – 240 km/h.

• Range – 15 km;

• 30+ minutes of flying time;

• Rate of climb – 80 km/h.

GAARPIA is substantially more expensive than similar anti-drone drones – its competitors cost in the range of ~$900. 

Despite its higher cost, it has two advantageous features: two engines, making the drone faster and more maneuverable, and the ability to perform kinetic interception, or 'hit-to-kill.' In this method, the operator directly literally hits the enemy's drone to shut it down. The drone is sturdy, so it is able to take a hit and be used again after some repair and maintenance.

2. Ukrainian drone maker Armadrone signs partnership with Danish MDSI 

The producer of REX and PUNISHER multifunctional drones, a company called MDSI, announced a strategic partnership last week. They will focus on integrating the guided payload carrier Mailman into Armadrone drones so they can use high-precision munitions.

“Currently, a joint R&D process is underway. We communicate both remotely and through reciprocal visits to each other's headquarters,” said Dmytro Dubas, head of communications at Armadrone, to Counteroffensive.Pro.

Joint products will be supplied as part of Danish military aid, so it does not need to undergo Ukraine’s Ministry of Defense's re-codification process. 

3. Troubles occur with defense procurement reform:

On January 24, Rustem Umerov, minister of defense, announced the dismissal of Maryna Bezrukova, director of the Defense Procurement Agency (DPA). The DPA is responsible for the supply of lethal weapons and equipment to the Ukrainian army. 

Umerov also announced the new director of DPA — Arsen Zhumadilov, who currently leads the State Logistics Operator, which supplies the army with non-lethal equipment. 

"Over the past six months, instead of timely provision of ammunition to the army, we had political games, ‘leaks’ of contracts and information, PR of inaction and non-fulfillment of KPI by a subordinate enterprise of the MoD," explained Umerov. He also dismissed his deputy, Dmytro Klimenkov.

The Supervisory Board comprises two state representatives - Yuriy Dzhygyr and Taras Chmut – and three international experts – Kateryna Kuznetsova, Patrick Auroy, and Lukasz Stolarski. Initially, it was reported that on January 21st, DPA Supervisory Board members unanimously supported the decision to extend the contract with Bezrukova. 

However, during a second vote on January 23, only the state representatives supported the contract extension (2 of 4 votes). They extended the contract thanks to the casting vote of the head of the Board, Yuriy Dzhygyr. However, then minister Umerov decided not to renew this contract.

The DPA Supervisory Board should have conducted an independent audit of Bezrukova's work to decide on a contract, but the Ministry of Defense ignored it, Yuriy Dzhygyr told Counteroffensive.Pro. However, the Board decided to move forward with the contract despite the absence of an audit. 

In early January, the Ministry of Defense changed its rules about firing top Agency leaders, said Anti-Corruption Action Centre. Now, the Ministry must approve the appointment and dismissal of the Agency head or deputy head. However, the main challenge is the legal aspect of implementing this — according to the law, only the Supervisory Board can appoint the Agency's head. 

For now, the Board voted to extend the contract with Bezrukova, and she claimed to continue working in normal mode. But on January 27th Zhumadilov confirmed that he took up his duties as interim acting director. He also remains the director of the State Logistics Operator.

We also reached out to Bezrukova and MoD, but we haven’t received an answer from them yet. Previously, Bezrukova said that the Ministry of Defense is acting contrary to the law and putting pressure on the Supervisory Board of the DPA.

In Collaboration with CENTRE UA – Ukrainian orders/legislation we’re tracking: 

Law 4019-IX of October 10, 2024, on contract military service for foreigners and stateless persons in officer positions.

Status: Implemented

This law allows foreigners and stateless persons to hold officer positions in the Ukrainian Armed Forces, National Guard of Ukraine, and State Border Guard Service of Ukraine. Previously, they could only serve as privates or sergeants. 

All foreigners will have to undergo a unique check. It will be conducted by the Recruitment Center for Foreigners, which has yet to be created. The Center will check

• the legality of their stay in Ukraine;

• criminal or administrative records under Ukrainian law;

• potential connections to foreign intelligence and other factors that may prevent service.

ON THE MOVE: Professional movement, promotions and industry news.

Know someone in the defense tech space who has made a professional move? Drop us a line at newstips@counteroffensive.pro! 

• Kateryna Hrechko left her CEO role at Techosystem, a union of Ukrainian technological companies. She also took a break from leadership.

• Kvertus, a Ukrainian manufacturer of EW (electronic warfare), is hiring a PR manager.

30 SECOND ELEVATOR PITCH:

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“We’re seeking $175,000 to bring our volunteer team on full-time and accelerate product development. This investment will fast-track innovation and help us shape the future of geospatial intelligence,” said Vadym Hlushko, CEO and founder of CyberBoroshnoDigital.

MUST READS:

• $60 million will be distributed monthly among the brigades of the Ukrainian Armed Forces for drone purchases, noted Rustem Umerov, minister of defense.

• The Poseidon reconnaissance drone, equipped with electric engines and a modern navigation system, has been approved for use by the Armed Forces. It operates at temperatures from -20 °C to +45 °C, can function for several hours autonomously, and flies beyond the reach of most enemy air defense systems, noted Dmytro Klimenkov, Ukrainian Deputy Minister of Defense.

• Ukraine and Sweden have agreed to cooperate in the defense industry and plan to establish the production and maintenance of Swedish CV-90 infantry fighting vehicles. Sweden has previously provided Ukraine with dozens of such vehicles for use on the battlefield. 

• Frontline, a Ukrainian startup developing AI drones, has secured investments through the Nezlamni Fund. The investment amount was not disclosed, but it is within the fund's standard ticket range: from $100,000 to $400,000. The funds raised will be used to develop and design new products.Share the newsletter

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