How can foreign investors invest in Ukrainian defence companies?

For investment in Ukrainian defence companies, foreign investors can use the same investment methods as in any other industry in Ukraine. Foreign investors can participate in Ukrainian limited liability companies (LLCs) and joint stock companies (JSC). There are no minimum or maximum shareholding requirements.

All basic rules for the functioning of the company are regulated in the company’s charter and other optional corporate documents. Where a joint venture is intended, the shareholders may further regulate their rights and obligations in a separate shareholders’ agreement (“SHA”).

Instead of investing directly into a Ukrainian company, parties may agree on an investment structure involving a holding joint venture company in a foreign jurisdiction. Such holding would then hold the shares in the Ukrainian company. Such holding structures may be advantageous for financing matters and also from a potential dispute resolution perspective.

What is the typical structure of a Ukrainian LLC?

The LLC is typically governed by the general meeting of the shareholders, while the execution of the business activity is performed by the (sole) general director or the (collegial) board of directors. Where several directors are appointed, they can have either sole power to represent the company individually, or only joint power. A mix with sole and joint representation depending on the matter or value is also possible.

Which currency restrictions are currently to be considered with respect to foreign investment?

After the full scale invasion, the National Bank of Ukraine introduced currency restrictions regarding the transfer of currency out of Ukraine.

Where foreign currency comes into the country when purchasing shares, no restrictions apply. Furthermore, dividends can be paid, at least up to a monthly maximum of EUR 1 million. However, when transferring shares to a Ukrainian entity during divestment, this Ukrainian entity cannot make a payment to the foreign seller of the shares. During these currency restrictions a realistic exit scenario would only be to sell the shares to another foreign investor. Read our previous publication on the exit liquidity issue of Ukrainian miltech companies.

Which permits and licenses are required to operate in the defence sector?

Ukrainian law distinguishes between licenses and permits. The term “license” refers to permission to engage in a certain commercial activity – for example banking activity, media activity or production/trade of alcohol, for which a special licence is required. Such a license is not required for activity in the sphere of weapons or ammunition production, or any other activity in the defense sector.

The term “permit” refers to a certain activity within production or other commercial activity and is typically a hazardous activity, either for involved employees, the environment or other. Such permits may be required for activity in the defence sector.

Which other requirements exist for companies active in the defence industry in Ukraine?

Ukrainian companies active in the production of defence goods shall register as defence suppliers with the Ministry of Defence. Read here how Ukrainian companies are producing ammunition for drones.

Which anti-corruption laws apply in Ukraine, and how do they affect the defence sector?

Ukraine's anti-corruption legislation can be divided in two main groups: Laws establishing general principles for anti-corruption policy and laws specifically regulating the defence sector.

Anti-Corruption Legislation Specifically Governing the Defence Sector consists of laws that specifically address corruption risks in the defence sector, providing measures aimed at improving transparency, oversight, and accountability within the sector.

• Law of Ukraine "On the Principles of State Anti-Corruption Policy for 2021-2025": This law sets the strategic direction for Ukraine’s anti-corruption policy over a five-year period, with specific attention to high-risk areas, including defence procurement and the management of defence-related assets.

• Law of Ukraine "On Defence Procurement": This law governs defence procurement, specifying, among other things, that any legal entity listed in the Unified State Register of Persons Who Committed Corruption or Corruption-Related Offences and/ or prohibited from participating in public and defence procurement under the Criminal Code of Ukraine is barred from participating in such procurement.

• State Anti-Corruption Program for 2023-2025: Approved by the Cabinet of Ministers in March 2023, this program identifies key corruption risks within the defence sector and outlines expected strategic outcomes.

Which mechanisms exist to minimize compliance risks?

Businesses should implement control procedures, follow internal rules, and report any potential violations. This includes maintaining a sanctions policy that is regularly updated in accordance with the Law of Ukraine “On Sanctions,” the Resolution of the Cabinet of Ministers of Ukraine "On Ensuring the Protection of National Interests in Future Claims of the State of Ukraine in Connection with the Military Aggression of the Russian Federation" dated March 3, 2022, No. 187, as well as international sanctions regimes.

Additionally, companies involved in public procurement through the Prozorro system (with contracts exceeding UAH 20 million) are required to have an anti-corruption program. This program involves assessing corruption risks, establishing rules for gifts and hospitality, conducting due diligence on business partners, managing conflicts of interest, providing channels for reporting violations, offering employee training, and monitoring the program’s effectiveness. Read one of our previous articles on how the Prozorro marketplace works.

How are imports and supply of defence goods treated for tax purposes?

Ukraine offers VAT and import duty exemptions for supplies / imports of defence-purpose goods, namely:

Components (parts) imported for use in production of defence-purpose goods are exempted from VAT according to Article 197.23 of the Tax Code, provided that the following conditions are met.

First, the goods imported and / or supplied fall into the classifications prescribed in Art. 287(8) of the Customs Code of Ukraine. These include gunpowder and explosives, pyrotechnic products, plastics and polymers, rubber, glass and glass products, ferrous metals, ferrous metal products, electrical machinery, land transport, aircraft, etc. Note that the exemption applies only to the goods stipulated in the mentioned provision. In each specific case, it is necessary to check whether the goods to be imported correspond to the codes listed in the Article.

Second, the goods imported and / or supplied are procured by a state customer (i.e. the transactions are made within the established defence procurement procedures).

The above-mentioned goods are also exempted from import duty, provided that the outlined conditions are met.

The import of goods “intended to address the causes and mitigate the consequences of martial law” are exempted from VAT. Such goods are listed in section 32 subchapter 2 chapter XX of the Tax Code of Ukraine, which among other things include special personal protective equipment, body armour, medicines and medical products, gunpowder for defence purposes, explosives for defence purposes, percussion capsules, detonators, fuses for grenades, projectiles for defence purposes, tanks and other self-propelled armoured vehicles, artillery weapons, rocket launchers, ammunition, and related components..

Which mechanisms exist to repatriate profits for foreign investors?

Profits distributed for the benefit of non-resident companies are subject to a repatriation procedure.As a general rule, dividends paid to non-resident companies are taxed with a 15% withholding tax (WHT), which is withheld, paid and reported by a payer. Note that a double tax treaty in place between Ukraine and a country of tax residency of the recipient may provide for tax exemptions and / or lower tax rates.

For instance, under a double tax treaty in place between Ukraine and Germany, dividends paid from Ukraine to Germany or vice versa shall be taxed at a 10% rate (5% - if the receiving company holds at least a 20% share interest in the paying company).

A non-resident company may obtain a certificate issued by the State Tax Service of Ukraine certifying the payment of Ukrainian WHT in order to credit Ukrainian tax against its national CPT with respect to such income.

What is important to know about resolving disputes in the defence sector?

There are two primary avenues for resolving disputes in Ukraine (including in the defence sector): state courts and arbitration, which may involve judicial and arbitral proceedings within Ukraine, as well as in foreign jurisdictions.

In the latter case, recognition of a foreign judgment or arbitral award by Ukrainian courts is necessary. This may be implemented under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, various other similar international treaties, which Ukraine has acceded to, as well as under the principle of reciprocity (which is presumed). Recognition of foreign judgments and arbitral awards in Ukraine is not automatic and often takes many months.

For most Ukrainian judges this type of proceedings is essentially a once-in-a-lifetime experience: hence, they often need to be “educated” by the parties. While the recognition process is pending, a Ukrainian court may issue freezing or another injunctive relief against the defendant. Such relief is typically available also in the regular Ukrainian litigations, as well as in support of arbitral proceedings.

Ukrainian courts generally do not tend to have anti-recognition bias (unless, of course, the beneficiary under a foreign judgment or arbitral award is a party affiliated with Russia or Belarus, a sanctioned individual or entity, etc).

However, the approach may occasionally be somewhat different when recognition is sought against a Ukrainian defence company. In this regard, Ukrainian courts may invoke – and interpret extensively – public policy as the grounds to deny recognition: see, for instance, judgment of the Supreme Court in the case of Ostchem vs. PJSC Odeskyi Pryportovyi Zavod (which, however, remains pretty much an outlier by now). Enforcing claims against Ukrainian defence companies, which have been included in the respective list of defence industry enterprises, during martial law is quite problematic: it is still possible to obtain a judgment or an arbitral award against such companies or even have a foreign one recognised in Ukraine. Nevertheless, once the bailiff opens enforcement proceedings against one of such companies, he will have to suspend these and, thus, perform no enforcement actions aimed at collecting the debt from the respective defendant. The aforementioned list of defence industry enterprises is not public. Therefore, a creditor may not even be aware whether its counterparty has been included into such a list and, accordingly, may need to investigate that (e.g. via the Ukrainian register of court decisions).

Finally, many Ukrainian defence companies are state-owned in full or in part (which can be checked in the Ukrainian corporate register). It should be remembered that Ukraine has historically had a moratorium (not even related to the martial law), which protects companies, in which the state holds no less than 25% of shares, from seizure and compulsory sale of their immovable property and other fixed assets. Thus, bailiffs are not able to seize and sell fixed assets of such companies to collect the debt. However, enforcement of claims against other assets (e.g. funds) is not restricted by the said moratorium.

Which state authorities are involved in defence procurement?

Ukrainian state authorities involved in defence procurement include central executive authorities and other state authorities and military formations established under the laws of Ukraine.

The main defence procurement authorities include the Ministry of Defence of Ukraine, the National Guard of Ukraine, the National Police of Ukraine, the State Emergency Service of Ukraine, and the Security Service of Ukraine.

The Ministry of Defence established the “Defence Procurement Authority” (DPA) and the State Operator for Non-Lethal Acquisition for procurement in the defence sector. Where the DPA is responsible for lethal equipment, the SONA is responsible for all other supplies. Currently there are intentions to combine both agencies in one.

How does defence procurement work?

Defence procurement is done through open tenders, through simplified procurement procedure, by selecting a supplier by requesting proposals from suppliers or by using a framework agreement. Here is our detailed report on the Ukrainian military’s defense procurement troubles.

In practice, however, most defence procurement is done without the use of the electronic procurement system due to security reasons. Suppliers are normally selected through a request for fee proposals based on commercial offers submitted by companies.

Very recently the Brave 1 Marketplace was introduced. It is an e-commerce platform where defence manufacturers can offer their goods and services, and where army units can purchase directly what they believe fits best for their purposes. The army units spend points depending on the equipment and the State Budget makes respective payments to the manufacturer. Read our article on how the Brave1 market works.

Is there any mandatory investment insurance?

There is no mandatory insurance for investments in Ukraine. Mandatory insurance typically applies to the assets which constitute sources of increased public hazard, like nuclear objects, aircraft, motor vehicles, and some other assets.

Which insurance is recommended for investments?

This depends on the type of business and underlying assets. In most cases, investors differentiate between insurance coverage for movable and immovable property. In the case of real estate construction, an all-risk contractor’s liability insurance may be obtained. Insurance against war risks is also recommended in most cases where investment includes tangible assets or might be prone to political violence.

Certain international institutions offer insurance coverage of investments in Ukraine. Also, many states offer political risk insurance for investors from these states as a means of economic development.

As of February 2025, political risk insurance and war risk insurance are offered by several Ukrainian players in the market. However, due to the absence of international reinsurance, the limits provided by local insurers tend to be quite modest (often around UAH 10-20 million) with significant exclusions.

Coverage mostly applies to private property, such as apartments and vehicles, while commercial premises, activities, and business interruption are usually not covered. Certain products providing coverage for commercial properties did appear on the market at the beginning of 2025 and are expected to evolve in the future as rebuilding efforts progress.

Market trends are highly dependent on the strategies of global reinsurers, who have been reluctant to re-open political risk coverage for Ukrainian jurisdiction due to the ongoing hostilities.

Which public insurance products are available for protection from potential losses in the defence sector?

Several international institutions offer war risk insurance in Ukraine to support businesses and investors. Their coverage typically applies to commercial properties, infrastructure projects, and general business investments. Given restrictions on financing military-related activities, these institutions are unlikely to insure assets or operations directly tied to defence manufacturing or military procurement. However, businesses indirectly supporting defence logistics or infrastructure may benefit from available coverage.

Some of the recent insurance programs of international finance organizations in Ukraine include:

• The Multilateral Investment Guarantee Agency (MIGA), part of the World Bank Group, provides investment guarantees against war-related risks, such as its coverage for the landmark project of M10 Industrial Park in Lviv. MIGA typically provides coverage of property damage and does not cover currency inconvertibility.

• Political risk insurance of The U.S. International Development Finance Corporation (DFC) can provide coverage for several types of political risk:

o   Currency inconvertibility

o   Political Violence

o   Expropriation and Takings

o   Arbitral Award Default and Denial of Recourse

o   Breach of Contract for Capital Markets and Non-Honoring of a Financial Obligation

• European Bank for Reconstruction and Development (EBRD), in partnership with Aon, has established a €110 million facility to enhance reinsurance capacity for private sector insurers, helping to sustain economic activity despite ongoing war.

There are a few foreign governmental programs available to investors.

One of the most prominent programs is the investment guarantees for new investments in Ukraine offered by the German government. This initiative aims to support German companies willing to invest in Ukraine by providing protection against political risks. The guarantees cover property damage up to the complete loss of the investment, as well as conversion and transfer risks for interest payments on equity-like loans.

Other countries, including, France, Canada, United Kingdom, Italy, Austria and Denmark have adopted and/or announced similar programs to support their national entities who are contemplating to invest in Ukraine.

The Export Credit Agency (ECA) of Ukraine offers insurance against war risks to support both foreign and domestic investments. This insurance covers a range of war-related risks, including military conflict, armed aggression, hostilities, mass riots, and terrorist acts. The ECA provides two main products: direct investment insurance for investors and investment loan insurance for banks. The investment must be aimed at creating facilities and infrastructure necessary for the development of the processing industry and export of goods of Ukrainian origin and must fall within the list of supported areas/goods as provided for in the law.

Which private insurance products are available to cover potential losses in the defence sector?

Insurance coverage for defence sector projects is not commonly offered by local insurers in Ukraine. Some insurers may provide coverage for goods in transit, but the coverage limits for such cargo are typically low. The limited availability of private insurance products is also influenced by the lack of adequate reinsurance, as the global reinsurance market generally avoids working with the defence sector.

Current laws permit foreign insurers to operate directly in Ukraine, subject to specific conditions. Foreign licensed insurance companies are allowed to conduct insurance activities in Ukraine, but only within certain insurance classes, such as for aircraft or watercraft.

Government policies for investments in the defence sector

One of the key directions of the state military-industrial policy, as emphasised in Strategy for the Development of the Defence Industry of Ukraine of 20 August 2021, is to ensure access for businesses to participate in projects for the production of defence products, to implement public-private partnerships, and to facilitate investment in the domestic and foreign markets.

The government is working to create a favourable legal environment for investors. In October 2024, the Parliamentary Special Commission and defence associations representing more than 400 defence companies signed a memorandum of cooperation. This document defines the steps necessary for the development of the defence industry, including legal guarantees and investment protection.

As part of the development of the legal framework in the defence sector, the Cabinet of Ministers of Ukraine Resolution No. 763 of July 21, 2023 initiated a pilot project aimed at the production, procurement, and supply of ammunition to enhance the country’s defence capabilities and reduce dependence on external suppliers.

Ukraine actively cooperates with international partners to attract investment in the defence industry. For example, in April 2024, Denmark announced the allocation of $9 million for investments in the Ukrainian defence sector, including the strengthening of maritime capabilities, the purchase of ammunition, drones and the production of missile components.

Ukraine and Denmark also launched a new mechanism for financing the procurement of weapons for the Ukrainian Defence Forces, aka the "Danish model". Read our report based on one of the Ukrainian companies that walks us through the details of the model. This initiative envisages financing of Ukrainian defence companies by the Danish government and other countries and consolidation of the Ukrainian defence industry under a single brand "Zbroya".

Does the Ukrainian government offer subsidies or grants for defence-related investments?

The Ukrainian government has been actively implementing support programmes to attract investment in the defence sector, providing subsidies and grants to stimulate the development of the defence industry.

One of the initiatives is the BRAVE1 grant programme, which provides financial support to defence technology developers from the budget of the Ministry of Digital Transformation. Under this programme, projects can receive grants from UAH 500,000 to UAH 2 million, subject to compliance with the 12 priority areas of the General Staff and defence expertisе. As of the end of 2024, 79 developments have already received funding worth $1.4 million, and an additional 49 projects are awaiting the signing of contracts worth $745 thousand.

In May 2024, the Government launched a grant programme for drone manufacturing companies. An enterprise can receive state support of up to 80% of the project cost, which contributes to the development of unmanned technologies in Ukraine. Under this programme, individuals and legal entities engaged in the production of aircraft and spacecraft, related equipment, and the manufacture of UAVs or parts thereof may receive a grant from the state of up to UAH 8 million (for equipment) but not more than 80% of the project cost.

Are there specific co-investment options, credit lines or guarantees by the Ukrainian Government for investments in the defence sector?

In November 2024 Ukraine launched a specific state aid program to assist defence companies. The program addresses certain issues regarding the provision of state financial support (loans) to defence-industrial complex enterprises deemed critical for the functioning of the economy. Ministry of Defence (MoD) through the Business Development Fund (BDF) partially compensates the cost of loans for defence manufacturing entities. Key terms include:

• To become eligible, the company must be designated by MoDas a critical for the defenсe sector;

• The funds must be used for development, manufacturing, repair, and modernization of weapons, special and military equipment, ammunition, and military-purpose products.

• Loan principal is up to UAH 100 million for working capital and up to UAH 500 million for project finance;

• Basic interest rate under the loan shall not exceed the 3-months Ukrainian Index of Retail Deposit Rates (UIRD) plus 5 bp. Maximum basic interest rate shall not exceed 23% p.a.;

• The term of the interest subsidy under the loan is up to 3 years for working capital and up to 5 years for project finance.

Interest compensation is provided to lower the borrower’s actual loan costs, reducing the base interest rate to 5% per annum. Here is our report on the state program for financing miltech loans.

UAH 500 million has been allocated to compensate for the difference in interest rates in 2025 alone.

Export opportunities in the defence sector

Currently, exports for Ukrainian companies in the defence industry are not legally prohibited, but in many cases are de facto blocked. To sell arms to the global market, a Ukrainian company must obtain export clearance from the State Service for Export Control (SSEC) as requested for by the CMU Resolution ‘On Approval of the Regulation on the State Export Control Service of Ukraine. Starting from 24 February 2022, producers found significant difficulties in obtaining export permits due to government controls to ensure the national defense interests of Ukraine.

As of January 2025, issuing more permits for Ukrainian arms exports is being actively discussed at the state level. Here is a walkthrough of all the details in obtaining permission from SSEC, which we made with Oleksandr Pavlichenko, former head of SSEC.

However, this restriction does not prevent exporters of dual-use products and civil suppliers to the military sector (transportation, communications, uniforms, protective gear, meals etc.). Those are permitted for export subject to general export clearance.

Is financing tied to meeting specific local requirements (e.g., local procurement)?

Public funding for the defence sector in Ukraine is mainly provided through the state budget, and major defence procurement is coordinated at the national level. However, receiving certain grants and financial support from the state has its own set of requirements.

The Brave1 programme is open to business entities or private entrepreneurs registered in or residing in Ukraine.

There are also certain requirements for receiving government grants for drone manufacturers. In particular, companies can receive a grant covering up to 80% of the project cost, provided they are (i) located in government-controlled regions, (ii) for those who seek receiving a grant of UAH 8 million, they must create at least 25 jobs, of which one third must be created in the first six months and the rest within a year. In addition, within three years of receiving the grant, a company must pay taxes and duties to the budget in an amount not less than the amount of the grant received.

Restraints on corporate finance in the defence sector (market conditions)

Investing in the defence sector can be approached through various vehicles beyond direct investments in startups.

Local producers and exporters of miltech can rely on following instruments:

• Equity financing (however, the financial regulator limits the dividends payable abroad and blocks repatriation of the foreign investment);

• Bank loans (whether a particular bank is ready to take risk of the armament and ammunition producer or, in general, supplier of the MoD, is a different issue).

• Grants. Several European governments prepay Ukrainian financial sector producers and then donate the products to the MoD.

• Bond issue;

• Venture capital for startups are increasingly investing in defence companies.

These funds pool capital from multiple investors to invest in promising defence tech startups and established companies. However, absent special treaty protection, equity investors will not be able to exit and can be paid only a limited dividend due to administrative controls on the outflow of the capital by the financial regulator.

Are there any restrictions in terms of cross-border payments for the goods in the defence sector?

The financial regulator - the National Bank of Ukraine (the NBU) - has the power to introduce restrictions on cross-border payments for goods and services imported or exported to/from Ukraine. The NBU has implemented a special procedure for purchasing foreign currency and making cross-border transfers to pay for import of goods and services, including those used in the defence sector.