When a Ukrainian company does business with a nonresident, it is not enough to consider only the Tax Code of Ukraine to determine the applicable tax rules. Cross-border transactions also require consideration of international treaties for the avoidance of double taxation concluded by Ukraine with other states. If an international treaty establishes rules different from those of Ukrainian legislation, the provisions of that treaty must apply. UNN, together with lawyers, examined how these rules work using the example of Ukrainian aviation, which currently operates abroad and mostly leases aircraft from nonresidents of Ukraine.
From a model convention to an international treaty
The system of international tax treaties is based on two model conventions — those of the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN). They are not international treaties in themselves, but serve as a basis for negotiations between states. During these negotiations, countries agree on specific tax rules, which are then enshrined in bilateral conventions.
In practice, states often use the OECD Model, the UN Model, or individual provisions of both documents. During negotiations, they agree, in particular, on rules concerning residency, permanent establishments, the taxation of dividends, interest, royalties, and business income, the elimination of double taxation, and the exchange of tax information
According to the lawyers, the OECD Model is more focused on taxation in the state of residence of the income recipient.
The key difference between the UN Model and the OECD Model is that the UN Model generally provides greater taxation rights to the state where the income is directly earned. For example, the UN Model establishes lower thresholds for the creation of a taxable presence through a permanent establishment. It also provides broader opportunities for taxing certain types of income in the source state
Therefore, for a specific transaction, what matters is not the OECD or UN Model, but the convention in force between Ukraine and the state of which the counterparty is a resident. According to the Ministry of Finance, 70 bilateral conventions and agreements on the avoidance of double taxation are in force between Ukraine and other states.
Why an international treaty cannot be ignored
Under the Constitution of Ukraine, current international treaties ratified by the Verkhovna Rada are part of national legislation. At the same time, the Law "On International Treaties of Ukraine" provides that if an international treaty establishes rules different from those set out in the relevant act of Ukrainian legislation, the rules of the international treaty apply.
The same principle is enshrined in the Tax Code of Ukraine.
If the relevant cross-border situation is regulated by an international agreement, its provisions must be taken into account together with the provisions of the Tax Code of Ukraine
Do international rules work in Ukraine
In practice, it turned out that not all international conventions operate in Ukraine. The situation involving aircraft leasing became a striking example.
The overwhelming majority of commercial aircraft used by Ukrainian air carriers are leased from foreign owners — nonresidents of Ukraine. Therefore, payments under such agreements are cross-border transactions, and their taxation cannot be assessed exclusively in isolation from Ukraine's international treaties.
The problem arose after the Bureau of Economic Security, acting independently and without corresponding amendments to tax legislation or international conventions, began interpreting airlines' leasing payments to nonresidents as royalties. In other words, investigators began treating the rental of air transport as the use of equipment.
Based on this approach, the BEB opened criminal proceedings against at least five air carriers, including MAU, "Constanta Airline," "Windrose," N3Operations, and "Skyline Express." According to UNN, another airline, "Urga," may also be involved in a similar case.
The investigations were launched despite the fact that almost all air carriers successfully pass tax audits, and the tax authorities' remarks concerning leasing applied to only one company.
Representatives of the aviation industry insist that the problem arose because of an ambiguous interpretation of legislative provisions and requires the development of a unified state approach. Moreover, treating aircraft leasing as royalties—something that does not occur in any other country in the world—makes Ukrainian carriers uncompetitive in the international market.
The current definition of royalties in the Tax Code of Ukraine is linked to remuneration for the use of, or the right to use, intellectual property rights, including patents, trademarks, designs, formulas, processes, and know-how. Leasing is not included in this list.
Some of Ukraine's bilateral conventions with other states provide for royalties for the use of industrial, commercial, or scientific equipment. For example, such a provision is contained in the current Convention between Ukraine and the United Arab Emirates. However, aircraft are not defined as equipment and, in accordance with international practice, royalties are not charged on the leasing of aircraft and helicopters from nonresidents.
State authorities are bound by Ukraine's international obligations
The situation with aircraft leasing demonstrates a much broader problem than a dispute over one type of payment between a state authority and an airline. It concerns, more generally, the predictability of state tax policy in international relations.
If Ukraine has concluded an agreement with a foreign state, consented to be bound by it, and it has entered into force, state authorities, when addressing matters covered by that agreement, must act with due regard to its provisions.
They cannot create a different system of international taxation for businesses merely by interpreting a transaction themselves. The classification of a specific payment must be based on national legislation and international law, while businesses must have clear operating rules.
For airlines, this issue is particularly sensitive, since international leasing is the fundamental mechanism for building an aircraft fleet. If the tax rules for such transactions can be changed through a new interpretation by state authorities without amending legislation or international treaties, businesses cease to be competitive and risk losing international contracts.
For a country that is integrating into the European and global economic space and seeking to attract foreign investors, the predictability of operating rules is no less important than their substance. For state authorities, the starting point must be unambiguous: cross-border tax relations must be assessed exclusively with due regard to Ukrainian tax legislation and Ukraine's international treaties in force.