VAT taxes burdens on Ukraine miltech

BLUF: Ukrainian miltech wants imported components to be charged VAT, to even the playing field for local producers. But lawmakers have not been swayed – yet.

The Cabinet of Ministers approved a three-stage procedure to re-certify personnel at the State Customs Service.

Ukraine’s Owl Tech Systems, is replacing Chinese radio components with Taiwanese ones – while also sourcing local production.

THE BIG STORY: Uneven tax rules leave domestic producers with a disadvantage

​​Ukrainian authorities exempted imported defense products from the country’s 20 percent Value Added Tax (VAT) back in 2023 to reduce costs for military-related goods.

Several decisions were made in the Verkhovna Rada and the State Tax Service, including establishing a list of exemptions from taxes: UAVs and related components, counter-drone solutions, radar stations, electronic warfare equipment, radio and communications gear, threads and materials for making body armor, body armor itself, armored vehicles, and weather stations.

Lawmakers also recently voted to exempt imported components for fiber-optic drones from taxes to reduce production costs.

But a great deal has changed in the Ukrainian defense industry over the past two years, and more and more companies are manufacturing products domestically.  

To name a few, Oko Camera, Odd Systems, Aeromotors and others are producing optics for drones, engines, and other crucial components inside the country.

But Ukrainian manufacturers that produce those same parts for fiber-optic drones are not exempt from value-added tax.

“Performers of government contracts, such as drone makers, can purchase individual components at a zero VAT rate. However, as manufacturers of critical components for drones - thermal imaging cameras, we do not have the same privileges and pay the standard VAT rate when purchasing materials and raw materials,” Denys Nikolayenko, CEO and co-founder Oko Camera, a thermal imaging camera maker, told Counteroffensive.Pro.

Because of this, domestic manufacturers struggle to compete with imports – especially since China often has the advantage in terms of volume, price, and production scale.

Sixty percent of the thermal optic cameras produced by Odd Systems are made from imported components, but the components are not exempt from the VAT because they are not on the list. Removing that tax could decrease the price of the product by 18-20 percent, said Andrii Taganskyi, business development director of the company. 

The process for receiving a VAT refund also works against weapons manufacturers. Currently, it takes up to eight or nine months to receive a refund. 

This means that when a manufacturer imports components to fulfill a contract with the government, they are reimbursed the 20 percent cost much later, forcing them to maintain working capital. This also hinders potential investment in production, according to the Ukrainian Council of Defence Industry (UCDI), an advocacy association for defense organizations.

Are changes in taxation realistic?

The Ministry of Digital Transformation has said it is looking into the number of components produced in Ukraine and the best way to improve the situation.

“The process is ongoing to avoid breaking anything, plus consultations with parliament's tax committee are needed." said Digital Transformation Minister Mykhailo Fedorov during a Brave1 event last month. "We hypothesized that this 25 percent margin [permitted profit for drone, EW and ammunition producers in government contracts] could be allocated to developing component production. And we've seen that several manufacturers quickly ramped up domestic production."

The Ministry of Digital Transformation did not immediately respond to a request for comment on where the issue stands now. 

But the relevant committee in the Verkhovna Rada has not taken any steps to make tax changes.

“For now, we don’t have any plans to change the [taxation] policy,” Danylo Hetmantsev, Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, told Counteroffensive.Pro.

The list of dual-use goods that can be used to produce weapons is too broad, he said, which is why the committee has no immediate plans to change the VAT policy. They are also not planning to remove VAT exemptions for imported defense goods.

The Ukrainian Council of Defence Industry has called for gradually phasing out exemptions for imported products. Over the past three years, Ukrainian alternatives have emerged, and import exemptions have complicated competition, the council said. 

 The council is working to determine which components are already made in Ukraine, which ones can be produced in Ukraine, and which ones are only manufactured overseas. This will provide clarity on where tariff exemptions still need to be maintained.

"If import exemptions are eliminated all at once, the cost of finished products for manufacturers will increase for a certain period—approximately 5 percent due to tariffs and another 1-2 percent due to credit servicing costs. But at the same time, this is precisely what stimulates the development of local manufacturers and the import substitution process," the UCDI told Counteroffensive.Pro.

Oko Camera and Odd Systems are supporting the UCDI proposals to slowly return VAT for importing goods.

One alternative to VAT exemption is participation in Defence.City, a special economic regime for defense product manufacturers (read more about it here). The new program provides exemptions from the following taxes:

But even this isn’t enough to level the playing field, Taganskyi said, because Chinese competitors will still be exempt from the 20 percent VAT tax.

BUSINESS LUNCH TOPICS: What our reporting shows!

The Cabinet of Ministers has approved a procedure to re-certify customs officers. Re-certification will be conducted by video and audio recording, with the recordings published on the State Customs Service website.

If personnel decline to undergo certification, it will be grounds for dismissal. According to Danylo Hetmantsev, the process will consist of three stages:

A commission has also been established to select a new head of the State Customs Service, a process that is expected to take six months. This means the December deadline agreed upon with the International Monetary Fund will not be met. 

We exclusively reported on the risk of missing this deadline back in September (read more here).

Replacing Chinese components in defense products is a complex and time-consuming process, despite continuous efforts by Ukrainian manufacturers to switch to alternative parts. (Read our coverage on that issue here.) One of the main challenges is the increased production cost of replacing Chinese components with, for example, European ones.

If the Chinese version of multichannel radio receivers used to monitor networks and intercept communications costs around $300, the American version is $2,400, Oleksandr Oleshko, CEO of Owl Tech Systems, a producer of defense radio electronics and control modules, told Counteroffensive.Pro. 

One possible solution is to develop a domestic product based on foreign technologies, he said. The company is working to create such a product with the cost reduced to around $1,000.

For Owl Tech Systems, one of the key areas of import substitution is Taiwan, one of the world’s leading producers of radio-electronic components. They are buying GSM and Wi-Fi modules to make radio direction finders.

Finland-based company Millog Oy is creating a service to test military products at a Finnish military range  This will be the only European Union site where weapons can be tested without strict limitations, Rasmus Basilier, development manager at Millog Oy, told Counteroffensive.Pro.

(Read our article about how Western companies can test their weapons in Ukraine here.)

Finland is not as densely populated as the rest of Europe, which allows testing of drones  with no threat to aviation. The current altitude restriction for drones is 2.9 km, according to Basilier.

Currently, the company has several pilot projects underway, after which it will look to expand its availability for testing slots. After testing, manufacturers will receive a certificate describing the test results.

To obtain NATO country contracts, producers often are required to undergo testing under jamming conditions. These conditions can be simulated at the testing range, Basilier said. The range allows the testing of drones, electronic warfare equipment, explosives, and artillery. 

Ukrainian startups are struggling to understand how to collaborate with European defense companies, Olga Millward, executive director of Nordar Nexus, a platform to boost cooperation between Ukraine and Denmark, told Counteroffensive.Pro.

With Ukraine now planning to radically open defense exports, the question of cooperation with allies is especially urgent. According to Millward, manufacturers often don't understand:

Companies also need to transition from creating stand-alone solutions to multi-domain operation concepts and building entire ecosystems, she said. 

Ukrainian orders/legislation we’re tracking: 

By: Oksana Zabolotna

Restricting Access to Information on Defense-Tech Enterprises

Resolution of the Cabinet of Ministers of Ukraine №1257 from October 3, 2025

Why it’s important: This establishes a legal mechanism to protect defense enterprises from the publication of sensitive information during wartime. 

This is especially relevant to data that could be exploited by the enemy, particularly information on production capacities, contracts, personnel, or enterprise locations. This reduces the risks of cyberattacks, sabotage, and missile strikes on miltech facilities.

At the same time, such restrictions must not become a tool used to conceal abuses or non-transparent decisions in the field of defense procurement. Since the resolution does not specify a list of information categories that should be restricted, access could be limited to almost any published data about a defense enterprise. This creates the risk of this mechanism being used to hide information of public interest and hinder anti-corruption investigations.

The legislation stipulates the following:

Stage: Entered into force on October 3, 2025

Initiator: The Cabinet of Ministers of Ukraine. 

What’s next: Implementation of the resolution.

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

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