While Ukrainian airlines, with the sky closed due to the war, are saving the industry by working abroad and ensuring foreign currency inflows into the state budget, they are being stabbed in the back domestically. Despite international agreements on avoiding double taxation and clarifying court decisions, the Bureau of Economic Security, under the leadership of Oleksandr Tsyvinsky, is trying to force airlines to pay again for aircraft leased abroad. This could have devastating consequences for Ukrainian civil aviation, writes UNN.
Since 2022, the sky over Ukraine has been closed to civil aviation due to full-scale Russian aggression. However, this does not mean that the aviation market has died. Domestic airlines were forced to reorient themselves to work abroad. They continue to fly all over the world and thereby help the economy of our state. After all, as Mykola Shcherbyna, an expert in transport and mechanical engineering, executive director of the Public Union "Ukrainian Air Transport Association," told UNN in an interview, Ukrainian air carriers pay up to 40% of their profits to the state budget in the form of foreign currency revenue repatriation.
In addition to budget revenues, working in the international market allows airlines to retain jobs, develop competencies, and implement technological innovations. Overall, it is about preserving the civil aviation industry during the war and its readiness for full recovery after the sky over Ukraine reopens.
However, according to the expert, recently airlines have faced fiscal pressure in the form of attempts at additional taxation. This refers to lease payments.
As Shcherbyna explained, the entire global aviation market operates under a single scheme where airlines do not buy aircraft, as it is too expensive, but lease them. Despite the fact that airlines fly exclusively abroad, thus generating profit and paying taxes in a foreign country, according to the expert, they are now trying to tax them even more in Ukraine.
This contradicts conventions on avoiding double taxation and creates unbearable pressure on businesses. Such an approach has an immediate negative effect. If aircraft leasing becomes more expensive due to additional taxation, then the entire activity of the airline becomes more expensive. A reduction in the lease payment for the lessor is unacceptable, as in such a case, such cooperation becomes unprofitable.
It is worth noting that international agreements are in force between Ukraine and a number of foreign countries, which provide for the avoidance of double taxation. The general rate of the so-called repatriation tax is 15%. However, according to international conventions, Ukrainian airlines are either completely exempt from paying this tax in Ukraine, as they have already paid it abroad, or its rate is significantly reduced to as low as 5%.
Despite this, domestic carriers face attempts to impose an additional fee on them.
Regarding airlines, I know at least 5 air carriers that have been attempted to be taxed in this way. In some cases, as far as I know, even the Bureau of Economic Security is involved, and criminal cases have been opened. I note that there is some selectivity in the approach of tax officials and representatives of the BES, where some are attempted to be taxed, while others are simply ignored. Although the working scheme is the same for the whole world.
The court has already put an end to the issue of lease taxation.
In 2019, the Kyiv District Administrative Court considered a dispute between PJSC "Ukraine International Airlines" and the then State Fiscal Service. It concerned the fact that UIA leased two Boeing B737-900ER aircraft from the British company Osprey Aircraft Leasing Ltd. The Ukrainian carrier accordingly paid taxes in Great Britain.
Despite the Convention between the Government of Ukraine and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation, which has been in force since 1993, the fiscal authorities fined UIA for non-payment of taxes in Ukraine.
Paragraph 3.2 of Article 3 of the Tax Code of Ukraine stipulates that if an international treaty, the consent to the binding nature of which has been given by the Verkhovna Rada of Ukraine, establishes rules other than those provided for by this Code, the rules of the international treaty shall apply. The Convention between the Government of Ukraine and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation, which has priority over the norms of the Tax Code of Ukraine, defines the specifics of collecting taxes on income and capital gains from residents of the Contracting States.
The court materials also state that the Convention stipulates: the profit of an enterprise of a Contracting State shall be taxable only in that Contracting State, unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.
Article 8 of the Convention specifically addresses the taxation of operations related to the operation of sea and air transport. In particular, profits derived by a resident of a Contracting State from the operation of ships and aircraft in international traffic shall be taxable only in that State.
The court also emphasized that the tax legislation of Ukraine establishes special conditions for taxing the income of non-residents with a source of origin from Ukraine in the presence of international agreements on avoiding double taxation.
In particular, Article 103 of the Tax Code of Ukraine provides for a reservation regarding the consideration of the norms of international treaties that have entered into force, on the avoidance of double taxation when residents or permanent establishments of non-residents pay income with a source of origin from Ukraine to a non-resident, since such norms have priority over the norms of domestic tax legislation. Paragraph 103.1 of Article 103 of the Tax Code of Ukraine states that the application of the rules of an international treaty of Ukraine is carried out by exempting from taxation income with a source of origin from Ukraine, reducing the tax rate, or by returning the difference between the amount of tax paid and the amount that the non-resident must pay in accordance with the international treaty of Ukraine.
In addition, the judge notes that the tax agent (in this case, UIA) has the right to independently apply the tax exemption or reduced tax rate provided for by the relevant international treaty of Ukraine at the time of income payment to a non-resident, if such non-resident is the beneficial (actual) recipient (owner) of the income and is a resident of the country with which an international treaty of Ukraine has been concluded.
Thus, in the end, the Kyiv District Administrative Court sided with UIA in the legal dispute and overturned the fiscal authorities' decision, explaining that Ukrainian airlines do not need to pay additional fees for aircraft leasing.
Court decision is not an obstacle to suspicion
Despite the court's decision, which thoroughly explained the application of international law, including Conventions that provide for the avoidance of double taxation of Ukrainian companies, the Bureau of Economic Security decided to prosecute UIA officials for using leasing. This happened almost 6 years later and concerned cooperation with a Cypriot company. Although it should be noted that the tax legislation regarding leasing taxation in Ukraine has not changed during this period.
This refers to suspicions against former UIA director Yevhen Dykhne and the carrier's former accountant.
According to the investigation, operational lease agreements for Boeing 737 and Embraer aircraft were concluded between a Cypriot company (the owner of the aircraft) and a Ukrainian airline.
In fulfillment of these agreements, in 2017–2022, UIA paid the Cypriot company income in the form of lease payments for the use of aircraft totaling over UAH 3.4 billion.
Using the Convention between the Government of Ukraine and the Government of the Republic of Cyprus on the avoidance of double taxation, which has been in force since 2013, the former management of the Ukrainian company applied a preferential 0% repatriation tax rate for payment in Ukraine when making the payment.
The BES is convinced that the application of the preferential rate by the former management of the Ukrainian airline did not comply with the terms of the concluded agreements and the actual needs for aircraft operation. Investigators believe that the airline should have paid a 10% tax rate to the budget, despite the fact that the company had already paid these taxes in Cyprus.
It is worth noting that at the start of the investigation, the investigation stated that 7 Boeing 737 and Embraer E 190 aircraft were subject to leasing. Why only two remained in the case is not yet precisely known.
Civil aviation under threat of destruction
It is obvious that the situation with the taxation of lease payments for Ukrainian airlines looks not just like a tax dispute, but like a systemic problem of law enforcement that hits an industry that, even with a closed sky, continues to bring foreign currency revenue to the state and maintain Ukraine's presence in the global aviation market.
When international conventions, norms of the Tax Code, and even already established judicial practice are effectively ignored by investigators of the Bureau of Economic Security, it creates not legal certainty for businesses, but a regime of constant risk. In addition, for airlines, which are currently forced to survive, additional and excessive financial pressure is created, as well as obstacles related to the investigation of such criminal cases.
In combination, the state, in the person of the BES, is destroying the competitiveness of Ukrainian aviation in the international market with its own hands, and thus killing an industry that is barely functioning as it is.
If such a practice of pressure through additional tax assessments and criminal proceedings continues, Ukraine risks not only losing part of its air carriers but also sending another signal to foreign investors and partners that even in strategically important sectors, the rules of the game can change contrary to international obligations.