Attempts to tax aircraft leasing as domestic income, ignoring the provisions of international conventions on the avoidance of double taxation, create a systemic conflict between the aviation business and the state and undermine confidence in Ukraine as a predictable partner. This is not just about tax reassessments. A practice is now being formed where the same operation can be taxed twice due to different interpretations of legislation, despite Ukraine's existing international obligations. This approach harms both the aviation industry as a whole and the state's reputation, writes UNN.
Attempts by the BEB to prosecute airlines
Earlier, UNN reported that a number of Ukrainian airlines faced attempts to prosecute them for alleged non-payment of taxes for aircraft leasing abroad. 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 "Ukraine International Airlines". In the criminal proceedings being investigated by the BEB 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.
In addition, there are claims by the BEB against PrJSC "Airlines Constanta" due to lease payments for the use of aircraft to a non-resident from the UAE.
According to the investigation, officials of PrJSC "Airlines Constanta", 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 non-resident income tax when paying lease payments for the use of aircraft.
The BEB believes that in this way the state allegedly underreceived UAH 28.3 million, and payments to a non-resident 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.
The legal construct of the BEB, which investigators tried to support with analytical conclusions expressing a number of assumptions, is based on the premise that payments for the use of aircraft allegedly do not fall under the regime of international transportation or air transport operation, but can be considered as royalties within the meaning of Article 12 of the mentioned Convention.
Avoidance of double taxation is not a goodwill gesture by the state
Despite existing international conventions on the avoidance of double taxation, in practice, companies are forced to separately prove the obvious: if an international treaty establishes rules for the distribution of tax rights between states, they must be complied with, and not ignored depending on the fiscal interest of one party or another to the agreement.
Danylo Vinnik, a lawyer specializing in international corporate law and fintech at Prikhodko & Partners Law Firm, explained to UNN that the mechanism for avoiding double taxation is not a tax benefit or a goodwill gesture by the state, but a basic instrument of international tax law designed to prevent repeated taxation of the same income without proper legal grounds.
"Ukraine has a wide network of existing bilateral agreements on the avoidance of double taxation. The general principle here is simple: if an international treaty provides for different rules than national legislation, the rules of the international treaty apply. But it is important to understand: the convention does not 'cancel taxes altogether'. It only distributes between states the right to tax a specific type of income," Vinnik noted.
According to the lawyer, for some incomes, such a right may belong only to the state of residency, for others - to both states, but with a limitation of the rate in the state of the source of income. Accordingly, if the income has already been taxed abroad, the state of residency must take this into account by crediting or another mechanism provided for by the international agreement.
"That is, the very fact that a company operates abroad or receives profit there does not automatically mean double taxation, but it also does not mean automatic full exemption from taxes in Ukraine. Each time it is necessary to analyze where exactly the income arises, how it is qualified, whether there is a permanent establishment, and what mechanism for eliminating double taxation is provided for by the relevant convention," Vinnik noted.
Formally, the agreement exists, but the right to it must be proven
The lawyer draws special attention to the fact that profits from business activities are generally taxed in the company's state of residence, unless it conducts activities in another state through a permanent establishment. That is, the mere fact of receiving income abroad or conducting activities outside Ukraine does not mean either automatic exemption from taxation or automatic emergence of a double tax obligation. It is necessary to establish where exactly the income arises, how it is qualified, whether there is a permanent establishment, and what mechanism for avoiding double taxation is provided for by the relevant convention.
"That is why, in real life, the problem is most often not with the convention itself, but with its application. Disputes usually arise due to reclassification of income, lack of proper supporting documents, doubts of tax authorities regarding the beneficial owner of the income, or issues of permanent establishment. Formally, an international treaty exists, but in practice, the right to a tax benefit often has to be separately substantiated and defended," the lawyer noted.
According to him, the problem is often not that an international treaty is absent, but how controlling bodies apply it. To use the provisions of the convention, it is not enough for a company to simply refer to its existence. It is necessary to confirm the tax residency of a non-resident, provide proper documents, and sometimes even prove that the recipient of the income is its actual, i.e., beneficial, owner. In addition, the legislation contains safeguards that allow the state to refuse to apply the benefits of the convention if the operation or structure was created primarily to obtain a tax benefit.
However, even the existence of such safeguards does not give the state the right to arbitrarily ignore international obligations. And it is precisely here that the situation in the aviation industry is particularly sensitive, where the leasing of aircraft obtained, for example, from companies in Cyprus or other foreign jurisdictions, is at the center of the dispute.
"As for aviation, and especially the leasing of aircraft taken, for example, in Cyprus, there is indeed a problem here, and it is not accidental. The main conflict arises at the level of payment qualification. From a business perspective, such an operation can be considered part of international transport activities, to which the provisions of the convention on the avoidance of double taxation should apply. From the perspective of the tax authority, this is often a regular leasing or rental payment to a non-resident, which is considered income from a source originating in Ukraine and therefore subject to taxation in Ukraine. In other words, the state and the taxpayer look at the same operation through different legal optics," explained Danylo Vinnik.
It's not just about leasing, it's about trust in the jurisdiction
The situation that has arisen with attempts to double-tax leasing operations used by Ukrainian airlines abroad, according to the lawyer, can be explained by a combination of two factors. This is a rather fiscal approach of the state to operations with non-residents, especially when they seek to impose an additional tax on a sufficiently sensitive industry - aviation. And also the complexity of the operations themselves in the field of aviation, where the line between international transportation, operational activities, and ordinary rent is not always obvious.
"As a result, the norms of the convention seem to exist, but their application depends on the specific contract structure, the role of the parties, the route of the vessel's use, the nature of payments, and the evidentiary base. That is why international treaties on the avoidance of double taxation should not just formally exist, but actually work. For business, this is not only a matter of the amount of tax burden, but also of the predictability of the rules of the game. If a company cannot understand in advance whether the international treaty will be recognized, it incorporates this risk into the cost of financing, logistics, leasing, business structuring, and investment decisions," Danylo Vinnik emphasized.
According to him, it is now essentially about trust in the jurisdiction.
"If the state signs an international treaty, but in practice complicates its application through a narrow or purely fiscal interpretation, this negatively affects the investment climate. For Ukrainian business, this means additional costs, and for foreign partners - doubts about how stable and predictable the rules of working with Ukraine are," the lawyer emphasized.
Danylo Vinnik is convinced that the success of applying international conventions on the avoidance of double taxation depends on the correct tax qualification of income, the structure of the operation, proper documents, and the taxpayer's readiness to defend their position. Especially where the fiscal interest of the state turns out to be stronger than the desire to consistently apply international law.
It should be noted that Conventions on the avoidance of double taxation should not work selectively and only when it is convenient for the state. If Ukraine declares integration into the international legal and economic space, it must ensure predictable and conscientious application of such agreements, including in such sensitive sectors as aviation. After all, the civil aviation industry of Ukraine can currently survive only due to work abroad and due to international contracts. Aircraft leasing cannot automatically turn into a tax trap just because of the desire, for example, of the BEB, to reassess the tax. Otherwise, it is no longer about tax policy, but about undermining trust in the state itself as a partner and participant in international obligations, as well as preserving an entire industry whose existence is threatened by fiscal pressure and criminal prosecution.