Attempts by the Bureau of Economic Security to reclassify lease payments for aircraft use as "royalties" have led to massive pressure on Ukrainian airlines. The BES has opened a number of criminal proceedings against air carriers operating in international markets, effectively questioning the application of conventions on the avoidance of double taxation. Airlines such as UIA, "Aviakompaniya Konstanta", "Urga", "N3OPERATIONS" and "Skyline" have already faced claims of alleged tax evasion, UNN reports.
Aircraft – intellectual property?
The key problem lies in the approach of the Bureau of Economic Security investigators, who try to tax lease payments for the use of aircraft operated outside Ukraine as income originating from Ukraine. This contradicts both the economic essence of the operations and the provisions of international conventions on the avoidance of double taxation.
The basis for such persecution was an article published by the State Tax Service of Ukraine during the leadership of Tetiana Kiriyenko, which interprets financial leasing operations as royalty payments, i.e., considers aircraft as intellectual property.
Global aviation business practice dictates that airlines lease aircraft from international companies and accordingly pay the lessor for the lease. Due to the war unleashed by Russia against Ukraine, the sky over our country is closed to civil aviation, and Ukrainian air carriers were forced to completely relocate their operations abroad – from flights to aircraft maintenance. This means that all their income and profits are generated abroad, and according to the law, taxes must also be paid abroad. In particular, for leasing – in the country of residence of the lessor. They only return foreign currency earnings to Ukraine. This is provided for by conventions on the avoidance of double taxation, ratified between Ukraine and a number of foreign states.
This system worked for 30 years. However, in 2024, the former leadership of the State Tax Service, without any grounds, as no relevant changes were made to tax legislation, decided to change this practice and impose an additional fee on Ukrainian airlines.
"The issue of aviation leasing taxation is not an abstract academic discussion. Ukraine's aviation fleet is almost entirely 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 lease payments, classifying them as royalties, this means an increase in airlines' operating costs. Ultimately, either tickets become more expensive for passengers, or airlines incur losses, or foreign lessors refuse to cooperate with Ukrainian partners on standard terms. None of these options are acceptable for a country that seeks to restore aviation mobility after the war," noted Olena Kuznechikova, Managing Partner of LAW GUIDE, expert in international tax planning, M&A, business structuring and asset protection.
Experts emphasize that with the correct application of conventions, the same income cannot be taxed twice. If an airline operates abroad and pays taxes in the relevant jurisdiction, Ukraine either has no right to additionally charge tax, or must apply limited rates in accordance with international agreements.
"The issue of taxation of lease payments made to non-residents is directly regulated by sub-paragraph 141.4.1 of the Tax Code and until recently had a relatively stable practice of application. If an international agreement on the avoidance of double taxation was concluded with the non-resident's state, then in many cases, the article on profits from entrepreneurial activity was applied to the lease of movable property, and therefore, in the absence of a permanent establishment of the non-resident in Ukraine, taxation in Ukraine was not carried out," noted Tetiana Shevtsova, Managing Partner of the Audit Company "Capital Plus", member of the Public Council under the Ministry of Finance.
The approach voiced by Kiriyenko's team in 2024 effectively ignores the fact that international conventions have greater weight than national legislation, including in matters of taxation. This, according to lawyers, creates risks of double taxation and undermines trust in Ukraine as a jurisdiction that adheres to international rules of the game.
UIA and "Aviakompaniya Konstanta": persecution for leasing
Criminal cases against airlines began to appear one after another after an article by now former tax officials stating that leasing operations with aircraft should be taxed as royalties.
According to Mykola Shcherbyna, executive director of the Public Union "Ukrainian Air Transport Association", at least five airlines have already suffered, against which investigators have opened criminal proceedings for alleged non-payment of taxes when making lease payments to non-residents. Among them, as UNN previously reported, was PJSC "International Airlines of Ukraine". In the criminal case being investigated by the BES against the former management of UIA, it is stated that investigators consider leased aircraft to be intellectual property, and the company should have paid royalties on these operations.
At the same time, the company traditionally applied the provisions of international conventions on the avoidance of double taxation.
A similar approach by the BES was applied to PJSC "Aviakompaniya Konstanta", which leased aircraft from a non-resident company from the UAE. According to the investigation, officials of PJSC "Aviakompaniya Konstanta" in collusion with a non-resident company from the UAE allegedly unlawfully applied the provisions of Article 8 of the Convention between Ukraine and the UAE on the avoidance of double taxation during the period from January 1, 2023, to March 31, 2025, which allowed them not to withhold income tax from non-residents when paying lease payments for the use of aircraft.
The BES believes that in this way the state allegedly underreceived UAH 28.3 million, and payments to non-residents should have been taxed at a rate of 15%. Although the income of non-resident lessors has nothing to do with Ukraine regarding the source of such income, and therefore is not subject to such taxation.
At the same time, it is important that for many years these companies underwent tax audits and had no comments regarding the taxation of leasing. None of the State Tax Service audits found violations with these operations, which directly indicates a change in approaches ex post facto.
Experts in international taxation and law have repeatedly emphasized that such reclassification contradicts the basic principles of tax law. In particular, lawyers note: if aircraft are not operated in Ukraine and do not generate income here, there are no grounds to consider such payments as income with a source in Ukraine.
N3Operations: criminal proceedings without tax violations
A separate illustrative case, which UNN managed to uncover, concerns the criminal proceedings of the BES against LLC "N3OPERATIONS". Within the framework of the criminal case, the BES is checking payments to foreign lessors under helicopter and engine leasing agreements. The investigation believes that the company unlawfully applied the provisions of international agreements on the avoidance of double taxation with the UAE, China, and Cyprus, which allegedly led to the non-payment of over UAH 71 million in taxes.
At the same time, the court materials available in the Unified Register of Pre-trial Investigations explicitly state that no tax audit that would have established a violation was conducted.
Moreover, as Vladyslav Klypachenko, director of LLC "N3OPERATIONS", told UNN, the company has conclusions from an international auditing company and a forensic economic examination, which confirm that lease payments are not subject to taxation in Ukraine, as the helicopters are not operated on its territory.
"We have conclusions from a well-known international auditing company that confirm that our company correctly applied international conventions with the UAE, China, and Cyprus. We should not have paid taxes for leasing in Ukraine, because that would have been a violation of these conventions and double taxation," Klypachenko noted.
He added that the main claim against the company is that the BES considers aircraft to be intellectual property, and therefore, according to the investigation, the company should have paid royalties for leasing. "This is a false interpretation and it contradicts international law and the Tax Code of Ukraine," Klypachenko emphasized.
Thus, in this case, as in others, it is a situation where criminal prosecution was initiated without an established tax offense, and therefore the grounds for opening a criminal case remain unclear.
"Urga" and "Skyline"
Another case is the criminal proceedings against the airline "Urga". In this case, the BES, according to court materials, is investigating the application of a zero tax rate based on a convention with Singapore. The investigation believes that the company unlawfully used the provisions of the article on international transportation and thus evaded tax payments.
As in other cases, in this one, the investigation does not consider aircraft to be vehicles and movable property, but classifies them as equipment, the operation of which allegedly should have entailed the payment of royalties.
The very logic of the investigators is again based on denying the right to apply the international convention on the avoidance of double taxation.
In the "Skyline Express" case, the BES went even further, directly stating that lease payments fall under the definition of "royalties" and should be taxed at a rate of 10%. This very statement is contained in the aforementioned article by former tax officials.
The investigation believes that the application of a zero rate in accordance with the convention on the avoidance of double taxation with Turkey was unlawful, and estimates budget losses at over UAH 83 million.
This case is illustrative as it demonstrates a systemic approach to reclassifying leasing into another type of income contrary to international practice and established approaches.
Consequences for the market
The persecution of 5 Ukrainian air carriers at once indicates that the situation has already become systemic and poses significant threats to the functioning of the entire civil aviation industry. In fact, a practice is being formed whereby any airline that leases aircraft abroad can become an object of criminal prosecution.
At the same time, such a position of the investigation, and therefore of the state, undermines the competitiveness of Ukrainian air carriers in the international market. In this context, it is worth recalling once again that it is precisely thanks to the work of airlines that they manage to survive and maintain the possibility of returning to Ukraine after the sky opens.
In addition, the mentioned criminal cases of the BES also undermine the state itself, or rather its image in the international arena. After all, in a situation where one article, based on speculation, can change approaches to taxation of an entire industry without changes in legislation and contrary to international law, other states have more and more questions about the trust and reliability of Ukraine as a partner.