Despite the closed sky, Ukrainian aviation has not only survived but continues to generate foreign currency revenue for the state by working abroad. However, instead of support, airlines face attempts at tax pressure through sudden changes in the taxation of aircraft leasing. For carriers, this effectively means additional costs that undermine their competitiveness in the international market. Mykola Shcherbyna, an expert in transport and mechanical engineering and executive director of the Public Union "Ukrainian Air Transport Association," told UNN about this in a blitz interview.
— Mr. Mykola, what is the current situation in the Ukrainian aviation market under full-scale war conditions? What are the main challenges?
— Undoubtedly, the key challenge for the aviation industry is the Ukrainian sky, which has been closed for five years due to the unprovoked aggression of our eastern neighbor. It has nullified the domestic passenger transportation market and significantly limited cargo aviation. Civil aviation in Ukraine has stopped flying. But it is important to understand that despite this, Ukrainian aviation lives and adapts. Aircraft manufacturing enterprises continue to operate here, design schools, engineering teams, and production chains are preserved. All this is critically important for the future recovery of the industry.
As for airlines, after the start of the full-scale invasion, they were forced to reorient to foreign markets. Currently, Ukrainian carriers operate flights exclusively abroad, work under contracts with foreign partners, and enter new segments. This is not just about their survival; it is also a contribution to our economy. Airlines generate foreign currency revenue and return it to Ukraine. They pay up to 40% of foreign currency earnings from their income to the budget. That is, even without a domestic market, the industry continues to generate revenue for the state budget.
— How have the approaches to airline operations changed during the full-scale war?
— Airlines have become more export-oriented. If previously a significant part of revenues was generated by transportation related to Ukraine, now these are entirely foreign operations. Companies operate in an environment of fierce international competition, where every percentage of costs from a partner matters, and the smaller it is, the more attractive the company is for cooperation.
And here a paradox arises. Ukrainian carriers compete with European or Middle Eastern companies, but at the same time, they have worse starting conditions due to regulatory and tax peculiarities. In the long term, this could lead to the displacement of Ukrainian players from the market due to a decline in their attractiveness to foreign partners.
— What specific regulatory and legal peculiarities are we talking about?
— Ukrainian airlines lease aircraft; in simple terms, they rent them from foreign non-resident companies. In modern aviation, leasing is not just a tool; it is the basic model of the industry's existence. The vast majority of the world's fleet operates under leasing conditions, and Ukrainian companies are no exception. That is, almost all fly on leased aircraft.
Why is that? Because, for example, an airplane costs tens or hundreds of millions of dollars. This is a colossal one-time burden on the financial balance. Leasing, on the other hand, allows for flexible fleet management, quick scaling up or, conversely, downsizing, and responding to market changes. And the costs in this case are significantly lower.
In the case of Ukrainian airlines, the state is trying to suddenly and unreasonably increase the tax burden on their activities, which is already financially overloaded due to the need for additional costs associated with wartime conditions. Despite the fact that airlines fly exclusively abroad and generate profits abroad, they are now trying to tax them even more. This contradicts conventions on the avoidance of 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 all airline activities become more expensive. A reduction in the leasing fee for the lessor is unacceptable, as such cooperation would then become unprofitable.
— What does the taxation of leasing mean in practice? What exactly is the problem?
— The problem is that in practice, a situation has arisen that businesses perceive as double or, more precisely, additional taxation. Formally, it looks like a tax on non-resident income, also known as a "repatriation tax." That is, 15% is withheld by the Ukrainian airline as a tax agent from the lessor.
But in fact, this is not a tax for a non-resident. In practice, the non-resident, i.e., the company that leases the aircraft, does not incur any losses. It simply includes these 15% in the contract value. That is, it is precisely the Ukrainian airline that is forced to pay both the cost of leasing and an additional 15%.
It is also worth explaining here that this tax is paid separately in the country where the lessor operates. This is where the conventions on the avoidance of double taxation that I mentioned should come into play. Ukraine has ratified such agreements with a number of foreign countries. Under some of them, this "repatriation tax" should not be paid at all, while under others it is significantly lower, for example, only 5%.
What do we have in the end? In the end, we have a 15% surcharge on the price specifically for Ukrainian companies, and no other player in the international market has such a burden. Accordingly, this creates a situation where a Ukrainian airline becomes less attractive a priori. And this is not a matter of management efficiency; it is a matter of the rules of the game, which in this case are dictated by the state itself in the person of tax and regulatory authorities. I would say that our airlines are effectively forced to pay a premium for operating under the Ukrainian flag.
— So, the additional fiscal burden falls precisely on Ukrainian enterprises?
— It is the Ukrainian company that acts as the tax agent. The non-resident in this case is fully protected, as they receive their "net" rate, and all additional costs are passed on to the Ukrainian lessee.
That is, this mechanism does not reduce the income of the non-resident company, which is the lessor. It simply makes the Ukrainian market more expensive, and as a result, we have a situation where Ukrainian companies pay more for the same resource than their competitors from other countries.
— You are saying that conventions on the avoidance of double taxation are in force between Ukraine and other countries. Do I understand correctly that it is incorrect to apply such taxation to leasing, considering that aircraft operate outside Ukraine?
— And this is probably the key question. Today, with the sky closed, Ukrainian aircraft physically do not operate flights in Ukraine. They work abroad, are based there, and are even serviced there, and accordingly generate income there, outside Ukraine.
So there is no economic connection of this income with Ukraine. But now, for some reason, the state is trying to tax a payment for an asset that is located abroad, used abroad, generates income abroad, and for which taxes have already been paid abroad.
This is nothing other than attempts to pressure businesses and, in general, an attempt to destroy civil aviation in Ukraine by completely displacing it abroad. But at the same time, I remind you, these companies provide revenue to the state budget in the form of foreign currency earnings.
— What is the practical effect of this tax burden for airlines?
— This "tax" effectively eats up all potential profit. That is, companies either work "at zero" or at a loss. And in conditions of war, closed skies, high competition in the international aviation market, and limited access to financing, this directly leads to the risk of bankruptcies, loss of fleet, and players leaving the market. In this situation, it is regrettable, and it is important to understand, that this is caused precisely by the position of the tax authorities. That is, it turns out that the tax authorities are now jeopardizing the further existence of civil aviation in Ukraine. It should be noted that the tax authorities introduced this approach in 2024. Before that, airlines did not perform such a function of a tax agent regarding leasing payments, annually submitted reports, and audited by international auditing firms, and no one had any complaints.
— Which airlines have faced this problem, can you name them? And what consequences could this have for the industry if the situation is not changed?
— 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, when some are tried to be taxed, while others are simply ignored. Although the operating scheme is the same for everyone.
As for the consequences, they can be catastrophic. Firstly, it is a further reduction of the Ukrainian fleet, because companies simply cannot maintain aircraft. Secondly, it is a loss of positions in the international market and the replacement of Ukrainian carriers by foreign ones. As a result, the loss of the industry as a whole.
Restoring aviation after the war without preserving businesses, without a fleet, and without teams will be practically impossible, and it will require significant time and effort.
— What solutions could rectify the situation?
— I believe that a review of the approach to taxing leasing payments is needed. The legislation on this matter has not changed, and why they decided to try to apply taxes where they should not be is unclear. We need to return to the legal framework and work according to international standards and conventions, as is accepted worldwide, and not invent the wheel as we go.
This is about leveling the playing field, not about any benefits or preferences. If Ukrainian companies operate in the global market, they should at least have equal rules of the game, and the state should be the one that supports them, or at least does not interfere. Otherwise, we will simply lose aviation as such.