Aircraft leasing is being equated to royalties: risks for Ukrainian air carriers
Kyiv • UNN
The BEB (Bureau of Economic Security) is persecuting airlines, believing that aircraft leasing operations should be taxed as royalties. Experts consider such fiscal pressure unfounded and emphasize a flawed interpretation of the legislation.
Ukraine has just under a hundred Conventions with foreign countries on the avoidance of double taxation. However, in practice, Ukrainian businesses operating in international markets face problems and attempts at additional fiscal pressure. This, for example, happened with a number of airlines that were forced to completely switch to working abroad due to the closed sky over Ukraine. Carriers lease aircraft and pay taxes for this abroad. However, starting from 2024, they are trying to tax them in Ukraine as well. The Bureau of Economic Security even opened a number of criminal cases for alleged non-payment of taxes and believes that instead of a tax for leasing, airlines should pay royalties. According to Tetiana Shevtsova, managing partner of the Audit Company "Capital Plus", member of the Public Council under the Ministry of Finance, the problem that businesses are facing today lies much deeper – in the plane of correct application of norms and qualification of income, particularly in the field of leasing operations, writes UNN.
"As for the statement that international treaties do not work and
As for the assertion that international treaties do not work and "double taxation" arises, such a generalization is incorrect. Provided that the convention on the avoidance of double taxation is properly applied and the established requirements are met (in particular, regarding the confirmation of non-resident residency, withholding and/or payment of tax in the appropriate case), the tax withheld in the source state of income is usually credited against the tax payable in the state of residency.
According to her, international conventions provide a clear mechanism for avoiding double taxation, which works effectively provided that the norms of both international and national legislation are correctly applied. That is, the key problem is not the agreements themselves, but the practice of their application.
One of the most sensitive areas today is the taxation of lease payments to non-residents. As Tetiana Shevtsova reminds, this area is directly regulated by the norms of the Tax Code of Ukraine and for a long time had a relatively stable practice of application.
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 agreement on the avoidance of double taxation was concluded with the non-resident's state, then in many cases, the article on business profits 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.
However, with time, the development of the tax system, and in the process of Ukraine's approximation to European standards, according to the expert, modern tax rules are being introduced, in particular regarding transfer pricing (TP), constructive dividends, controlled foreign companies (CFCs), etc. Ukraine's accession to the Multilateral Instrument (MLI), as well as the active use of the provisions of the Model Tax Convention on Income and on Capital, also played an important role in changing approaches.
MLI is a multilateral convention that allows simultaneously changing the effect of many agreements on the avoidance of double taxation without re-signing them. It introduces rules to counter aggressive tax planning, including checking the business purpose of operations and the status of the beneficial owner of income.
The Model Tax Convention on Income and on Capital is an OECD model tax convention that serves as an international standard for concluding and interpreting tax treaties. Based on it, tax authorities and courts determine how different types of income should be interpreted (for example, what constitutes royalties and what constitutes business profit).
The interpretation of international treaties after Ukraine's accession to the Multilateral Convention MLI in 2019, as well as the use of the approaches of the OECD Model Convention, led to a more detailed reading of the norms and an appeal to generally accepted international practices.
Along with quality approaches, fiscal interpretations also appeared, which create additional risks for businesses.
It is worth noting that Ukrainian airlines, like any foreign ones, lease aircraft, as it is much cheaper. Previously, they paid taxes in the country where the lessor company was registered, if it was not a resident of Ukraine, and there were no problems with taxation.
However, everything changed in May 2024. The State Tax Service, under the leadership of Tetiana Kiriyenko, published an article with reflections on the fact that aircraft leasing should be taxed as royalties. The then tax officials were not stopped by the existing legislative norms and the fact that an aircraft is a vehicle, not intellectual property. At the same time, neither Ukrainian legislation nor international agreements changed.
Such an interpretation of tax legislation gave impetus to the Bureau of Economic Security, and criminal proceedings appeared against almost all (with the exception of one player in the aviation market) Ukrainian airlines that lease aircraft.
On this path, taxpayers and specialists encounter both qualitative approaches (in particular, in certain cases with TP, in matters of beneficial ownership of income, as well as the priority of international treaties in taxing constructive dividends), and purely fiscal approaches, due to the ambiguity of certain definitions and norms (...) And the very issue of qualifying rental (leasing) payments as royalties is probably one of such fiscal initiatives.
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.
Separately, Shevtsova draws attention to the legal nature of vehicles.
Secondly, aircraft, wagons, trucks and other vehicles should not be automatically equated with "equipment", since by their legal and accounting regime they are a separate category of assets – vehicles.
In addition, even in cases of applying royalty rules, international conventions set limits on the tax rate.
At the same time, according to her, national legislation also does not provide grounds for automatic reclassification. In particular, the Tax Code of Ukraine distinguishes between rental (leasing) payments and royalties as different types of non-resident income. At the same time, the definition of royalties in the Tax Code of Ukraine is formulated differently than in many international treaties and does not contain a direct mention of granting the right to use industrial, commercial or scientific equipment.
According to Shevtsova, this difference can be used by businesses to protect their interests within the framework of administrative or judicial appeal of fiscal decisions in relevant disputes.
Thus, the problem lies not in "non-working" international treaties, but in the correct qualification of income under the Tax Code of Ukraine and the relevant convention, as well as in proper documentary confirmation of the right to apply the international treaty.
In the case of airlines, such a practice is particularly dangerous, as it concerns the preservation of the civil aviation industry as a whole. The destruction of the competitiveness of Ukrainian air carriers due to additional fiscal pressure and criminal prosecution jeopardizes an entire industry, which in the future could become a driver of Ukraine's post-war economic recovery.
Recall
Earlier, UNN reported that a number of Ukrainian airlines faced attempts to bring them to justice for alleged non-payment of taxes for leasing aircraft 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 opened criminal proceedings for alleged non-payment of taxes when making lease payments to non-residents. Among them, as UNN previously reported, was PJSC "International Airlines of Ukraine". In the criminal proceedings being investigated by the BEB against the former management of UIA, it is stated that investigators believe that aircraft taken on lease are intellectual property and that the company should have paid royalties on these operations.
In addition, there are known claims by the BEB against PJSC "Airline Constanta" due to lease payments for the use of aircraft to a non-resident from the UAE.
According to the investigation, officials of PJSC "Airline 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 income tax from the non-resident 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 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.
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 operation of air transport, but can be considered as royalties within the meaning of Article 12 of the mentioned Convention. However, such an approach does not withstand criticism from lawyers and tax experts.