Preferential VAT regime for repairs of military equipment: Business Ombudsman Council stresses need for reform 

Defense companies are currently concerned about tax policy, particularly with regard to VAT exemptions. Under the current VAT regime, some of the public funds allocated for the repair of military equipment are diverted from the actual repairs to tax payments.

This issue was raised during the presentation of an investigation by the Business Ombudsman Council (BOC) at the Media Center Ukraine.

As Vladyslav Kaluha, junior investigator at the BOC, pointed out, under the current rules, imported military equipment received as part of international technical assistance (ITA) is exempt from VAT. However, repair and modernization services for this equipment are subject to VAT, placing an additional financial burden on enterprises.

“Today, unfortunately, we face a situation where the import of military equipment provided through ITA projects is exempt from VAT because it’s easier and more cost-effective. At the same time, services to repair and upgrade this equipment are taxed and not exempt. This problem has been brought to our attention by businesses, especially repair companies that we have met with,” he explained.

According to Kaluha, the issue is critical for two main reasons: “First, the 20% VAT increases the cost of each unit of equipment being repaired. To put it simply, for every five units repaired with VAT, we could afford to repair one additional unit if this tax wasn’t applied. Secondly, the problem is aggravated by the fact that the VAT paid by these enterprises goes to a non-taxpayer – the military unit that orders the services – which means that this VAT is not reimbursed from the budget”.

Kaluha also noted that this situation greatly complicates the process of repairing military equipment, which is damaged daily in combat.

“Military equipment is constantly being hit on the battlefield and needs constant repair and restoration. That’s why, in our opinion, this closed VAT cycle does not help with the problem of repairing military equipment. We suggest that the focus should be on ensuring that the funds specifically allocated for these repairs actually go to the repairs themselves and not to a new VAT cycle,” he added.

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