The issue of taxing transport leasing operations, particularly aircraft, in Ukraine has gone far beyond a professional discussion or an individual tax case. The Bureau of Economic Security (BES) is attempting to establish a new practice in which classic rental payments for transport by Ukrainian companies abroad are being reclassified as royalties. This interpretation not only contradicts basic legal norms and creates risks of double taxation but could also lead to the loss of the entire aviation industry, which is critical for Ukraine's post-war recovery, UNN reports.
The Bureau of Economic Security is investigating a number of criminal proceedings involving almost all Ukrainian companies that lease aircraft abroad from non-resident companies of Ukraine. Investigators are convinced that airlines should pay royalties in Ukraine, i.e., a fee charged for the use of intellectual property. At the same time, the fact that transport is not intellectual property is completely ignored, as is the fact that Conventions on the Avoidance of Double Taxation are in force between Ukraine and a number of countries. According to these agreements, Ukrainian companies pay taxes in the countries where the lessor companies are residents. At least 5 airlines have already suffered from BES pressure: UIA, Constanta Airline, Urga, H3OPERATIONS, and Skyline. Furthermore, court materials indicate similar approaches in other sectors, with attempts to impose an additional levy on leased railway transport and even agricultural machinery.
It is important to note that for over 30 years, the legislation regarding the taxation of leasing has not changed and previously raised no questions or remarks from either tax or law enforcement authorities. Therefore, there are clearly no justified grounds for the Bureau of Economic Security investigators to change the interpretation of the law, and the situation looks exclusively like pressure on business that harms the state.
A vehicle is not an object of intellectual property
The key error underlying the approaches of the Bureau of Economic Security investigators is the conflation of the legal nature of tangible objects, such as transport, and intangible rights.
According to the law, a vehicle is a technical device designed for the transport of people and goods. This category includes, in particular, cars, railway rolling stock, sea and river vessels, as well as aircraft, such as planes and helicopters. They are tangible objects of civil circulation that can be transferred into ownership or use, including through leasing.
In contrast, intellectual property refers to rights to the results of creative activity: inventions, utility models, industrial designs, trademarks, copyrighted works, etc. It is intangible in nature and protects not the physical object itself, but the idea, technical solution, or form of expression.
As lawyers emphasize, even if a vehicle is created as a result of intellectual activity, this does not mean that the object itself becomes intellectual property.
"That is, to be recognized as intellectual property, a specific object must contain a new technical solution or other innovation that is appropriately protected in the form provided by law, and as a general rule, transport, especially that which is a result of mass production, is not and cannot be recognized as such an object," explained Alina Parkhuta, an intellectual property lawyer at the LOGIC law firm, in a comment to UNN.
Leasing and royalties have different legal natures
According to Ukrainian tax and international law, royalties are payments for the use of or the granting of the right to use intellectual property objects. This refers to intangible assets: technologies, brands, software, patents.
In contrast, leasing is a form of property relations within which one party transfers to another the right to use a tangible object, in particular a vehicle, for monetary payment.
Thus, payments for the leasing of aircraft or other transport are, by their economic essence, a fee for the use of property, not for the use of intellectual property objects. Any attempt to equate them to royalties is legally incorrect, lawyers emphasize.
International conventions take priority over national law
The application of international treaties is of particular importance in this matter. Ukraine is a party to about a hundred conventions on the avoidance of double taxation, which directly regulate the procedure for taxing income from the operation of vehicles in international traffic.
Since the sky over our country is closed due to Russia's war against Ukraine, all civil aviation activity is currently concentrated abroad—that is where air transportation and aircraft maintenance are carried out. Consequently, profits are generated outside Ukraine and taxes are also paid in foreign states.
"According to the Constitution of Ukraine and procedural codes, the changes made in 2018 state that if there is a relevant law regulating certain relations and there are international acts ratified by Ukraine, they have higher authority than the internal legislation of Ukraine," explained Rostyslav Kravets, lawyer and partner at the Kravets & Partners law firm, in an exclusive comment to UNN.
As a rule, Conventions on the Avoidance of Double Taxation provide that income from the operation of aircraft is taxed in the country of residence of the lessor company. This is why qualifying leasing payments as royalties effectively nullifies the effect of these international agreements.
"The issue of taxing aviation leasing is not an abstract academic discussion. Ukraine's aviation fleet is almost entirely located abroad. All Ukrainian airlines—UIA, SkyUp, Windrose, and others—lease aircraft through leasing structures, often registered in jurisdictions with an extensive network of DTA (double taxation avoidance conventions - ed.): Cyprus, Ireland, Great Britain. If Ukraine systematically taxes leasing payments by qualifying them as royalties, it means an increase in the operating costs of airlines. Ultimately, either tickets become more expensive for passengers, or airlines suffer losses, or foreign lessors refuse to cooperate with Ukrainian partners on standard terms. None of these options is acceptable for a country seeking to restore aviation mobility after the war," noted Olena Kuznechikova, managing partner of LAW GUIDE and expert in international tax planning, M&A, business structuring, and asset protection.
In addition, modern instruments of international tax regulation should be taken into account, in particular the Multilateral Instrument (MLI) and the provisions of the OECD Model Convention, which clarify approaches to determining the source of income and the distribution of taxing rights between states.
Double taxation as a systemic risk
The practical consequence of reclassifying leasing as royalties in the cases investigated by the BES is double taxation. Income that is already taxed abroad, in the jurisdictions where the lessors are registered or where activities are carried out, is additionally taxed in Ukraine. Interestingly, this system only applies to Ukrainian companies, so they are effectively being forced to pay a kind of 'flag surcharge,' which deprives them of competitiveness in the international market.
As lawyers point out, if conventions are properly applied, this should not happen. However, if international norms are ignored, Ukrainian companies find themselves in a situation where the same income is taxed twice.
"The issue of taxing leasing payments made to non-residents is directly regulated by sub-paragraph 141.4.1 of the Tax Code of Ukraine and until recently had a relatively stable practice of application. If an international treaty on the avoidance of double taxation has been concluded with the non-resident's state, then in many cases regarding the rental of movable property, the article on business profits was applied, and therefore, in the absence of a permanent establishment of the non-resident in Ukraine, taxation in Ukraine was not carried out," explained Tetiana Shevtsova, managing partner of the Capital Plus Audit Company and member of the Public Council under the Ministry of Finance, in a comment to UNN.
Devastating consequences
The aviation industry is one of the most sensitive sectors in wartime conditions. Ukrainian airlines do not have the opportunity to operate in Ukraine and also effectively have no alternative to leasing, as it is a global practice for rapid and cheaper fleet formation.
If the BES still manages to defend its position on reclassifying leasing payments as royalties despite international law and Ukrainian legislation, it will lead to devastating consequences for the economy. Moreover, all sectors where companies use leased transport will suffer—the aviation industry, railway transport, as well as the agro-industrial complex.
Increased operating costs for companies, decreased competitiveness in the international market, the risk of termination of contracts with foreign lessors, and a reduction in foreign exchange earnings generated by the aviation industry—according to experts, this is only the beginning.
In a broader context, this sends a negative signal to foreign investors regarding the predictability of Ukraine's tax policy and damages our country's image as a reliable partner.