The situation regarding the taxation of aircraft leasing is already going far beyond a tax dispute and is turning into a question of survival for the entire Ukrainian civil aviation industry. Any attempts to interpret standard leasing payments as royalties create risks of double taxation, loss of international contracts, and the destruction of the industry even before the Ukrainian skies are opened. This was noted in his blog by Mykola Shcherbyna, an expert in transport and mechanical engineering and executive director of the Public Union "Ukrainian Air Transport Association," reports UNN.
"Ukrainian civil aviation has been living for several years in a reality where the usual rules of the industry do not work. The closed sky zeroes out the domestic market, forces companies to move operations abroad, seek international contracts, rebuild fleet basing, and maintain the airworthiness of aircraft under difficult conditions. However, the main task of airlines today is not just to 'survive another month.' It is strategic: to preserve the business, teams, and competencies so that at the moment the airspace opens, Ukraine does not find itself without its own civil aviation," Shcherbyna notes.
He emphasizes that any sharp change in conditions for the industry, even if presented as a "fiscal issue," in practice turns into a question of existence. Shcherbyna explains that aviation operates on long cycles and long contracts. "Everything that adds uncertainty instantly turns into a price: more expensive financing, tougher leasing terms, more difficult negotiations with insurers, and a more cautious position from counterparties," the expert adds.
According to him, despite the lack of changes in legislation, a position from the former team of the State Tax Service has appeared in the public space, which changed the interpretation of leasing payments that airlines pay for renting aircraft abroad to royalties. Such an approach calls into question the basic operating model for the global aviation market.
"This changes the perception of an operation that is standard for the global market and creates a chain of consequences in which a tax dispute turns into a reputational and law enforcement risk. Cases involving UIA, Constanta Airline, Urga, H3OPERATIONS, and Skyline Express are in focus. For the market, this means a simple thing: international partners have an additional argument to consider the Ukrainian jurisdiction unpredictable exactly where maximum stability is needed," Shcherbyna noted.
Royalties are payments for the use of or the granting of the right to use intellectual property objects: patents, know-how, trademarks, copyrights. Leasing, however, does not involve the transfer of intellectual property rights—it is a fee for the use of transport, which includes airplanes and helicopters.
"For the aviation business, leasing is the basic model of existence. An aircraft is an asset of extraordinary value. In wartime conditions, access to capital is limited, risks are high, and compliance and safety requirements do not become any softer. When a company leases an aircraft, it is not buying the 'right to intellectual property,' but the opportunity to carry out transportation, fulfill contracts, and maintain a team. And it is this logic—the logic of using a tangible asset—that lies at the heart of a healthy legal approach," Shcherbyna points out.
The expert also emphasizes that there are international conventions on the avoidance of double taxation, designed to ensure that international operations remain predictable and that businesses can count on the stability of rules.
In his opinion, due to a unilateral change in the approach to leasing taxation, the state risks losing the trust of international partners.
"Uncertainty in the qualification of payments means uncertainty in rates and the right to tax, and therefore—the risk of double taxation and additional assessments. But even more dangerous is that uncertainty for an international partner is read as jurisdictional risk. In a competitive market, this is solved simply: the contract goes to the one who has fewer risks and more predictable rules," Shcherbyna emphasizes.
The expert is convinced that Ukraine needs a de-escalation of the situation and a return of the leasing issue to a clear legal field. In particular, a unified, clear state position on the qualification of leasing payments in international operations, predictability of law enforcement, and a clear line between tax control and forceful intervention are needed. And this position, according to Shcherbyna, cannot be formed "post factum" when the market is already living in risk, but must be developed in dialogue with industry representatives.
"After the sky opens, Ukraine will have a huge need for transportation—for the return of people, for the economy, for reconstruction, for international projects. If Ukrainian companies lose their fleet and teams now, the country will get flights, but it will not get its own industry. Therefore, the issue of leasing today is not just about tax qualification. It is a question of whether there will be anyone to return to the Ukrainian sky under the Ukrainian flag," Shcherbyna concludes.
Addendum
The Bureau of Economic Security is investigating a number of criminal proceedings involving almost all Ukrainian companies that lease aircraft abroad from non-resident companies of Ukraine. Investigators are convinced that airlines should pay royalties in Ukraine, i.e., a fee charged for the use of intellectual property. At the same time, the fact that transport is not intellectual property is completely ignored, and Conventions on the avoidance of double taxation are in force between Ukraine and a number of countries. According to these agreements, Ukrainian companies pay taxes in the countries where the lessor companies are residents. At least 5 airlines have already suffered from the pressure of the BES: UIA, Constanta Airline, Urga, H3OPERATIONS, and Skyline. In addition, court materials indicate similar approaches in other industries; they are trying to impose an additional fee on leased railway transport and even agricultural machinery.
It is important to note that for over 30 years, the legislation regarding the taxation of leasing in Ukraine has not changed, and previously it did not raise questions or remarks from either the tax or law enforcement authorities. Therefore, there are obviously no justified grounds for the investigators of the Bureau of Economic Security to change the interpretation of the legislation, and the situation looks exclusively like pressure on business that harms the state.
The situation changed after the State Tax Service of Ukraine, under the leadership of the old team of Tetiana Kiriyenko—known for repeated attempts to persecute entrepreneurs—released an article on May 24, 2024, with explanations regarding the taxation of leasing operations by airlines. In these "reflections on the topic," tax officials indicate that aircraft leasing from non-resident companies must be taxed as royalties. At the same time, the fiscal authorities juggle articles of international conventions on the avoidance of double taxation, claiming that for aircraft rentals, airlines must pay fees as if for the use of intellectual property.
It is worth noting that Ukrainian airlines are not the only ones who lease airplanes and helicopters. Almost all global air carriers operate under the same approach, as it allows for faster and cheaper operations. And it is precisely this approach to taxation—paying fees in the country of the lessor's residence—that corresponds to the global practice of the aviation market.
But after the change in the approach to interpreting the legislation, according to Mykola Shcherbyna, an expert in transport and mechanical engineering and executive director of the Public Union "Ukrainian Air Transport Association," Ukrainian airlines are forced to effectively pay a "flag surcharge," i.e., pay for being Ukrainian.
"Accordingly, this (change in the interpretation of legislation – ed.) creates a situation where a Ukrainian airline becomes less attractive a priori. And this is not a question of management efficiency; it is a question 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 surcharge for operating under the flag of Ukraine," he noted in an interview with UNN.