A ticking time bomb: how the tax service under Kiriyenko led to criminal prosecution of aviation market players

Back in May 2024, the State Tax Service, led by Tetiana Kirienko, published an article stating that aircraft leasing could be interpreted as royalties. In practice, these reflections transformed into a large-scale problem and threatened to destroy the aviation business in Ukraine. What initially seemed like a discussion paper later became the basis for criminal prosecution and systemic pressure on companies operating under generally accepted international rules, writes UNN.

In the article, published on May 24, 2024, a new interpretation of financial and operating lease transactions for aircraft as royalty payments was proposed. Despite the fact that Ukrainian legislation in this part has not changed, and judicial and tax practice for years recognized such operations as leasing, this interpretation provoked a dangerous precedent.

In fact, a "time bomb" was laid, which went off in 2025, when law enforcement agencies, in particular the Bureau of Economic Security, actively joined the process. It was according to the logic set out in the article that investigators equated lease payments with royalties and, on this basis, opened a number of criminal proceedings against airlines.

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 case being investigated by the BEB against the former management of UIA, it is stated that investigators consider aircraft taken on lease to be intellectual property and that the company should have paid royalties on these operations.

In addition, there are known claims by the BEB against PJSC "Aviation Company Constanta" due to lease payments for the use of aircraft to a non-resident from the UAE.

According to the investigation, officials of PJSC "Aviation Company Constanta", in collusion with a non-resident company from the UAE, allegedly improperly applied the provisions of Article 8 of the Convention between Ukraine and the UAE on the avoidance of double taxation from January 1, 2023, to March 31, 2025, which allowed them not to withhold income tax from a non-resident when paying lease fees for the use of aircraft.

The BEB believes that in this way the state allegedly underreceived UAH 28.3 million, and payments to the 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.

As tax experts explained to UNN, the problem lies not only in the change of approach, but in the complete disregard for the economic substance of transactions. Aircraft leasing is a basic tool for the functioning of the global aviation industry. Practically all airlines in the world use aircraft under leasing terms, as purchasing a fleet requires billions in investments.

International tax lawyers point out that equating leasing with royalties is methodologically flawed. Royalties are payments for the use of intangible assets, i.e., intellectual property, while leasing involves the transfer of a tangible object for use, in the case of the aviation industry – an aircraft.

The issue of aviation lease 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, qualifying them as royalties, this means an increase in airlines' operating costs. Ultimately, either passenger tickets become more expensive, 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.

Moreover, such a substitution of concepts directly contradicts international double taxation treaties to which Ukraine has acceded. According to their provisions, income from the operation of vehicles in international transportation is taxed under special rules that do not provide for double fiscal burden.

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 of Ukraine and until recently had a relatively stable practice of application. If an international double taxation treaty was concluded with the non-resident's state, then in many cases, the article on profits from business activities 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.

The problem lies in the broad definition of royalties in international treaties, which includes, in particular, payments for the use of equipment. However, as the expert emphasizes, such a definition cannot be applied mechanically.

In the context of interpreting the concept of "royalty", it can be argued that the mention of industrial, commercial or scientific equipment should be analyzed systematically – together with other objects of intellectual property and know-how, and not automatically extended to any property that is leased.

However, the approach voiced by Kirienko's team in 2024 effectively ignores these principles. This is what creates risks of double taxation and undermines trust in Ukraine as a jurisdiction that adheres to international rules of the game.

If a 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 situation is complicated by the fact that for a long time, airlines operated without any claims from tax authorities. They passed inspections, used standard leasing taxation models, and did not face additional charges. That is, the business operated within established practice that was recognized by the state.

However, after the appearance of the mentioned article, the position changed dramatically. This created a classic situation of legal uncertainty, where the rules of the game change retroactively. In such circumstances, all airlines found themselves at risk of criminal prosecution, even if their activities were previously recognized as legal.

Experts interviewed by UNN emphasize that such a practice has all the hallmarks of a systemic problem. It is not just about a tax dispute, but about the use of criminal proceedings by investigators of the Bureau of Economic Security as a tool of pressure on business. This is especially dangerous for the civil aviation industry, which is forced to survive by working in international markets due to the closed sky over Ukraine due to the war.

At the same time, Ukrainian airlines currently operating abroad ensure the inflow of foreign currency earnings into the budget of Ukraine. In such circumstances, additional pressure through dubious tax interpretations can have critical consequences – from loss of contracts to the complete cessation of airline operations.

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 the business, without a fleet and without teams will be practically impossible, and it will require significant time and effort.

According to him, a situation has now arisen in which Ukrainian airlines, operating according to international standards, are effectively forced to pay a "flag premium."

Without clear methodological explanations and a unified practice of applying tax legislation, the situation will only worsen, and the entire aviation market will come under criminal pressure. Business needs predictability, not the risk of criminalization of standard operations. This is about the need to return to basic principles – the priority of international law, taking into account the economic substance of operations, and preventing double taxation of air carriers.

Otherwise, the "bomb" laid in 2024 in the form of a single publication with tax officials' reflections will continue to explode with new cases, undermining not only the aviation industry but also Ukraine's investment reputation in general, and ultimately destroying Ukrainian aviation.