Ukraine’s new legal structure for defense producers: Pros/Cons

READ IT IN PRO FIRST: Two days ago, The New York Times published an article on how fishing nets are used to catch Russian drones. We covered this issue four months ago in March. Don’t fall behind. Sign up for Counteroffensive Pro to be on the cutting edge of emerging technologies!

BLUF: The need to create a separate economic regime for arms manufacturers arose due to obstacles in the sector. Low production capacity utilization, staff shortages, and relocation challenges slow down the miltech industry – and the bill aims to solve this. 

Ukraine’s MoD has launched the DOT-Chain Defence marketplace, making it easier for military units to purchase equipment they need. 

Kvertus has upgraded the Azimuth system to intercept video from enemy drones. And the Ukrainian drone maker General Cherry has updated its interceptor drone to take down Russian Gerbera dummy drones.

THE BIG STORY:  The new regulatory regime for defense producers

Ukrainian lawmakers have introduced a set of four draft laws aimed at creating a special legal regime for defense companies. 

These initiatives would result in ‘Defence City,’ a category for manufacturers in the military production sphere (despite the name, the manufacturers can be physically located anywhere in Ukraine). 

A group of around 130 members of parliament out of 398 have come out in support of the proposed changes, which has sparked widespread discussions in the defense sector.

Creating special economic conditions in Ukraine is a new twist on an established phenomenon. The IT industry has already been given a boost with the economic zone Diia.City. Some defense manufacturers currently operate within Diia.City, such as Buntar Aerospace, a drone maker.

What Defence City means for manufacturers

One of the main goals of the special economic zone is to propel Ukraine into the top five global arms manufacturers, MP Danylo Hetmantsev, one of the bill's initiators, told Counteroffensive.Pro. 

Hetmantsev is also the chairman of the Verkhovna Rada Committee on Finance, Taxation, and Customs Policy. 

If approved, the proposed legislation would create a list of defense producers who would become residents of Defence City. That status would provide:

• Simplified export controls for dual-use and military technologies;

• Simplified customs procedures;

• Exemption from several taxes (land tax, real estate tax, environmental tax, income tax on reinvestment);

• New rules on currency control by the National Bank of Ukraine;

• Support for relocating production to safer parts of Ukraine;

• Exemption from criminal liability for officials of defense industry enterprises for violations during the execution of defense contracts;

• Protection of data normally on public registers about defense industry manufacturers.

The proposal includes exemptions from profit taxes on the condition of reinvestment, from land tax on real estate, and from environmental tax for 10 years. 

All current preferences are also preserved, including benefits for employees at relocated enterprises and a full exemption from VAT, which is 20 percent in Ukraine.

Creating such a special classification would help Ukrainian enterprises meet the needs of the Armed Forces. And a special export regime would also enable them to sell to – and compete with – other countries, Hetmantsev said.

One of the draft laws that has proved to be the most controversial provides for exemption from criminal liability for manufacturers. 

Specifically, it stipulates that investigations will only be opened with the agreement of the Prosecutor General, a move that could give him excessive powers, according to the Defense Ministry’s Public Anti-Corruption Council. Currently, the Security Service or the National Anti-Corruption Bureau can initiate an investigation independently. 

The Anti-Corruption Council has compiled a list of what it sees as the main problems with the initiative:

1. The risk of creating a select few ‘chosen' producers instead of opening a competitive ecosystem.

2. Miltech companies participating in Diia.City will not be allowed to join Defense City.

3. Getting an income tax exemption involves a more complicated procedure than it currently does.

4. A flawed process for relocation that requires the producer to relocate first, and only later receive compensation.

5. Vagueness surrounds what exactly would be exempt from criminal liability.

The draft bill also proposes to exempt defense firms from criminal proceedings if there are indications of a criminal offense. This applies only if the offense was committed in the course of fulfilling a state defense contract, and if it was necessary to ‘strengthen defense capabilities’ and for ‘significant public benefit.’ This also applies to criminal proceedings initiated even before the company joined Defence City. 

The exception is if these actions were a threat to people or might cause an ecological catastrophe. Criminal law measures (like imprisonment) can't be applied to these officials during their residence in Defence City. 

The wording ‘strengthening defense capabilities’ and ‘significant public benefit’ is vague, which leaves a door open for corruption, wrote Dana Yarova, a former advisor at the Ministry of Defense. Price inflation can be disguised as patriotism, and bypassing tenders can be justified as operational efficiency to enhance the country's defense capabilities, she said. 

Alternative amendments to the Criminal Procedure Code will be prepared to allow room for authorities to use their discretion, said Davyd Arakhamia, co-author of the draft bills. This should eliminate the ambiguous phrasing of ‘strengthening defense capabilities’ and ‘significant public benefit.’

The draft laws could be considered by lawmakers as soon as next week – July 15. Each of the four draft bills will be considered separately. The controversial changes on criminal liability may be voted on later after finding a compromise, Arakhamia said.

Why is a special regime needed for defense?

Ukraine’s defense industry needs further deregulation and legislative changes, Hetmantsev said. At the moment, the main difficulties include:

• Production capacity utilization is only at around 30 percent, according to Tech Force in UA, a private association of over 50 manufacturers.

• The threat of Russian attacks and the need for relocation to safer regions.

• Export restrictions that, in many cases, don't allow arms supplies abroad.

• Penalties for contract non-fulfillment, even for objective reasons, such as a fire at production facilities. The customer can decline to recognize force majeure circumstances, and the case may wind up in court.

Additionally, each defense sub-sector has its own unique set of problems. For example, electronic warfare manufacturers cannot sell products to farmers who want to protect their equipment, because they can only supply the Defense Forces.

Here’s another one: It's more profitable for component manufacturers to buy parts abroad because this exempts them from VAT. If the same product is manufactured in Ukraine, there is no tax exemption.

Currently, Ukrainian weapons manufacturers support the proposal to create Defence City. Tech Force in UA and the National Association of Ukrainian Defense Industries have publicly supported the initiative. 

“This is an important signal for the development of the industry and the scaling up of joint production. We will monitor the implementation and see how the special regime works in practice,” Bohdan Sas, co-founder and CCO of Buntar Aerospace, told Counteroffensive.Pro.

Tech Force in UA declined to comment, noting that the Verkhovna Rada committee will hold a meeting between the defense industry and lawmakers this week.

BUSINESS LUNCH TOPICS: What our reporting shows!

1. Ministry of Economy reviews draft law on export control 

The State Service for Export Control (SSEC) sent the draft law on SSEC reform (№549-IV) to the Ministry of Economy on June 2nd. It’s still under review, Oleh Tsilvik, acting head of the SSEC, told Counteroffensive.Pro.

The draft law aims to align the SSEC’s work with European Union regulations. It also provides for the SSEC to receive a special status that would allow it to develop its own bylaws, instructions, and forms, some of which haven't been updated in decades.

It will be critical for the new law to create clarity and reduce bureaucratic overlap, Oleksandr Pavlichenko, the former head of SSEC, told Counteroffensive.Pro.

“We stipulated this in the law and clearly defined other bodies in the role of export so that there would be no overlap of powers or interference in the work of the service. Because now there is often uncertainty about powers, which allows decisions to be blocked,” said Pavlichenko.

Currently, ministry representatives are discussing details of the draft law and negotiating with international partners. Afterward, the draft law must be considered by the Verkhovna Rada once it is submitted by the Cabinet of Ministers. The deadline for the law’s passage is the end of the year.

2. Ministry of Defence launches DOT-Chain Defence market 

Ukraine launched the DOT-Chain Defence marketplace on July 7. This marketplace from the MoD will be funded by the Defense Procurement Agency, which is in charge of lethal weapons supplies to the military. 

Currently, only FPV drones are available for purchase, but there are plans to expand to include electronic warfare equipment and ground drones in the future.

Ten Ukrainian military units will participate in a pilot launch. The system works as follows:

• Manufacturers list their products on the website;

• Military units select the equipment they need within their budget. They also leave reviews and ratings for products;

• The DPA collects military orders, pays for orders, and oversees deliveries.

Currently, only codified products are available, but there are plans to allow the sale of non-codified products in the future, said Alona Zhuzha, IT Advisor at the Department of the State Operator for Non-Lethal Acquisition.

RELATED: Read our report on Brave1 Marketplace that also launched recently, and serves as an alternative platform for fulfilling military needs. They're allowed to sell non-codificated products.

3. Kvertus reconnaissance stations can now intercept video from enemy drones

Ukrainian manufacturer Kvertus updated its Azimuth electronic reconnaissance stations to  intercept video channels from enemy drones. This will enable military personnel to respond more effectively to threats of attack, Yaroslav Filimonov, CEO of Kvertus, told Counteroffensive.Pro

The screen is displayed on a laptop that comes bundled with the Azimuth system. The electronic reconnaissance system is also integrated into the Delta system to improve situational awareness.

The station can detect drones in the frequency range from 30 to 6000 MHz, and it has an instantaneous bandwidth of 200 MHz, meaning that is the range of frequencies the system can process at a time. 

Detection accuracy is achieved by installing multiple antennas on the Azimuth. The difference between the data allows for determining the drone's flight direction. The direction-finding margin of error is 5 degrees or less. Developers are now working to reduce the margin of error to 3 degrees because, at a distance, a 5-degree error translates into hundreds of meters. The more Azimuth units installed, the more accurate the detection will be.

4. New solution to intercept Russian kamikaze drones

The Ukrainian kamikaze drone maker General Cherry has modified its General Cherry AIR interceptor drone. It is now capable of countering Russian Gerbera drones, described as a 'younger brother' of the Shahed-136. Russia is increasingly using them for massive attacks to overwhelm Ukrainian air defense. 

"Gerbera usually flies at a speed of 140-160 km/h, which allows the General Chereshnya AIR drone to hit such a target," explained Rudolf Akopian, Director of Strategic Communications at General Cherry.

However, the drone's technical characteristics don’t allow it to reach the speed of a Shahed, which flies at 250-300 km/h, and sometimes up to 400 km/h with modified jet engines. They also fly at much higher altitudes. Developers are working on improvements to counter Shahed drones, and they plan to unveil such a product in the coming months.

Ukrainian orders/legislation we’re tracking: 

By: Oksana Zabolotna

Changes to procurement of Ukrainian-made drones and electronic warfare systems

Resolution of the Cabinet of Ministers of Ukraine No. 693 dated June 11, 2025

Why it's important: These amendments will cut down on bureaucratic red tape in the procurement process for tactical-level UAVs and electronic warfare systems. This will speed up production and delivery times to the Armed Forces.

Proposals: 

• The resolution eliminates previous rules that required state customer representatives to be involved in testing, quality control, and approval of tactical-level drones and EW equipment. Their mandatory role in inspections, documentation, and shipment is no longer necessary.

• Now, these systems can be approved without the state customer’s involvement—only a contractor-issued quality certificate is needed. State quality checks may still be performed following the approved regulations.

Link to Defense Tech:

Reducing the production cycle for tactical-level UAVs and electronic warfare systems will positively impact the development of new technologies and the improvement of existing military technologies.

Stage: Came into effect on June 14, 2025.

Initiator: Cabinet of Ministers of Ukraine.

What’s next: Implementation of the resolution.

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 [email protected]! 

• James Westlake was appointed to launch the UK unit of Ukrainian intelligence firm Molfar. He is a former British Army officer and previously worked at Someroy, a UK-UA consultancy that connects businesses with investors and customers.

• Alina Guseva resigned from her position as COO at United Angels Network, a community of angel investors. She did not respond to our request for a comment.

• Daniel Hallett became director of the UK office of Frankenburg Technologies, a developer of missile interceptors. Previously, he worked as  director for Ukraine and Central & Eastern Europe at Babcock International Group, a British defense company.

• Mariia Gurska has joined Brave Inventors as a PR Manager. Previously, she worked at Leleka Foundation Ukraine, a charitable organization.

30 SECOND ELEVATOR PITCH:

SkyLab UA is a manufacturer of advanced ground drones, the Sirko-1S, and aerial drones. The Sirko-1S is a versatile platform capable of performing logistics, mine-laying, demining, and evacuation operations. The startup is currently developing new AI-based products in its own R&D center.

“We are looking for $500,000 in investments to scale up production, develop new EW and engineering modules, and enter international markets,” said Yevhenii Rvachov, CEO and co-founder of the company.

The startup is considering options for selling part of its shares or returnable investments.

MUST READS:

• Ukraine signed a memorandum with Denmark to establish joint production lines on Danish territory. Kyiv will transfer military technologies to new Ukrainian companies in Denmark.

• The Export and Investment Fund of Denmark will invest $5 million in D3 Venture Capital to support Ukrainian defense technology.

• Ukraine will start joint production with the American drone maker Swift Beat. They will produce interceptor drones to counter drones and missiles. The agreement provides for hundreds of thousands of drones to be produced this year.

• Ukraine’s Kramatorsk Heavy Machine Building has registered an international patent for the industrial design of the Bohdana artillery system. The design is patented both as a separate artillery module and in its complete configuration on a chassis.

• American FPV maker Neros Technologies, which has provided about 1,000 of its Archer drones to Ukraine in the six months starting from February, aims to build a new factory and produce up to one million drones per month, provided it secures a contract with the Pentagon. At the moment, it is capable of producing approximately 1,500 drones per month.

Thanks to our media partner: