Attempt to tax aircraft leases abroad harms the aviation industry and Ukraine's international reputation

Attempts by Ukrainian regulatory bodies to interpret aircraft leasing as royalties create serious risks not only for individual airlines but also for the entire system of Ukraine's international tax relations. This approach could lead to double taxation, uncertainty in the operating conditions of Ukrainian businesses in foreign markets, and even call into question the state's ability to adhere to its own international obligations. This was stated in her article by Olena Kuznechikova, managing partner of LAW GUIDE, an expert in international tax planning, M&A, business structuring, and asset protection, writes UNN.

Earlier, UNN reported that a number of Ukrainian airlines faced attempts to hold them accountable 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 case 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 reports of claims by the BEB against PrJSC "Airline Constanta" due to lease payments for the use of aircraft to a non-resident from the UAE.

According to the investigation, officials of PrJSC "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 for 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 fees for 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 containing 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 aforementioned convention.

As international tax expert Olena Kuznechikova explains, the very logic of such claims is highly questionable from the perspective of international law.

Double taxation under the guise of "correct qualification"

According to Kuznechikova, international tax conventions were created precisely to prevent the same income from being taxed twice - in the country of source of income and in the country of residence of the recipient.

The issue of aviation leasing 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: Cyprus, Ireland, Great Britain. If Ukraine systematically taxes lease payments, qualifying them as royalties, this means an increase in airlines' operating costs. As a result, either ticket prices for passengers increase, or airlines incur losses, or foreign lessors refuse to cooperate with Ukrainian partners on standard terms. None of these options is acceptable for a country that seeks to restore aviation mobility after the war.

Ukraine has signed dozens of bilateral conventions on the avoidance of double taxation, but in practice, attempts are made to circumvent their essence through an interpretation of certain norms that is beneficial to the budget. BEB investigators believe that airlines should have withheld repatriation tax for aircraft leasing, as such payments should have been considered as royalties, and not as another type of income.

This, according to the lawyer, is where the main legal error lies.

Why is aircraft leasing not a royalty?

Key to this discussion is the question of what exactly constitutes a royalty in international tax law.

Olena Kuznechikova explains that the modern international approach, enshrined in the OECD Model Convention, has long moved away from the practice of classifying equipment rental as royalties.

The OECD Model Convention (Organization for Economic Co-operation and Development - ed.) has been developed since 1963 and from the very beginning reflected the interests of developed Western countries - primarily capital exporters. Its central idea is simple: the right to tax income belongs to the country where the payer is a resident. The country where the source of income arises (source country) is significantly limited in its rights.

According to her, lease payments for machinery, transport, and equipment are business profits.

It is fundamentally important that since 1992, the OECD has deliberately excluded payments for the use of industrial, commercial, or scientific equipment from the definition of royalties. Lease payments for machinery, transport, and equipment are business profits under Article 7, or transport rental within international transportation under Article 8, and not royalties.

In other words, if an airline pays a foreign counterparty, who is a non-resident, for the use of an aircraft, this is not "passive" income from the use of intellectual property or technology. This is a normal business operation.

That is why, in most cases, such income should be taxed not in Ukraine, but in the country of residence of the lessor company, if it does not have a permanent establishment in Ukraine.

What is the state's benefit from such reclassification?

According to Olena Kuznechikova, the problem lies not only in the legal conflict and the lack of a unified approach to interpreting leasing operations, but also in the state's fiscal motivation.

It is obvious that the SFS (State Fiscal Service of Ukraine - ed.) finds it more profitable to consider payments for the use of aircraft as royalties, when Ukraine will have the right to tax, and not as rent within international transportation or business profit, when taxes should only be foreign, and in Ukraine, essentially, a zero tax rate will be applied instead of 10% (15%). Therefore, the tax authority takes the position "prove that you have the right to a benefit" - and the process of proving (refuting additional charges) can last for years, through the courts.

It is precisely this qualification that opens up the possibility of applying a repatriation tax at a rate of 10% or even 15%, whereas if the payment is recognized as business profit or income from international transportation, Ukraine generally does not acquire the right to such taxation.

In fact, it is an attempt by the state to change the rules of the game after an international treaty has been signed, become part of national legislation, and been in effect for many years.

The Cyprus case: when the state started playing against its own agreement

Kuznechikova draws particular attention to the convention between Ukraine and Cyprus on the avoidance of double taxation, which BEB investigators refer to in aviation leasing cases.

She explains that the old agreement between Cyprus and the USSR indeed allowed for a broader interpretation of the term "royalty" and could cover payments for the use of equipment. However, the new version of the Convention, ratified by the Verkhovna Rada of Ukraine, is based on OECD logic, not UN approaches.

In particular, the new convention between Ukraine and Cyprus, signed in 2012–2013, which replaced the Soviet treaty of 1982, is officially based on the OECD Model Convention. This is confirmed by negotiating materials and legal reviews of the treaty. This is where the key conflict arises.

That is why, according to the expert on international taxation, the use of the old approach by tax and investigative bodies to a new agreement is legally flawed.

The situation with aircraft leasing, specifically with Cypriot counterparties, is a classic case where the state tries to reinterpret the convention in its favor.

This clearly indicates an attempt to use the existence of two Conventions, one of which has effectively lost its force, to grant Ukraine the right to a tax that the contracting states did not intend at all.

Judicial practice in Ukraine

Despite the lack of established judicial practice, Ukrainian courts have repeatedly sided with taxpayers in similar disputes regarding the taxation of aircraft leasing.

The lawyer reminded that in the UIA case, the courts confirmed the legality of applying the provisions of the international convention and exempting the non-resident's profit from taxation in Ukraine through the use of Article 8 regarding international transportation.

Another important case was the "Windrose" case, in which the Supreme Court in 2021 directly rejected one of the most common arguments of the tax authority that the lessor cannot be considered a beneficial owner of income if he himself is not the owner of the aircraft.

The court recognized that the lessor independently conducts business activities, has a significant number of counterparties, and independently determines the further fate of the received income. This is sufficient to recognize beneficial status. This decision is an important precedent that rejects one of the favorite tools of fiscal aggression - denying the beneficial status of the lessor on the grounds that he himself leases or buys an aircraft from another company.

International judicial practice regarding leasing

Unlike Ukraine, foreign courts have already formed a clear approach in disputes regarding the taxation of aircraft leasing.

In contrast to Ukrainian uncertainty, international judicial practice regarding the leasing of vehicles and its qualification in the context of DTA (double taxation avoidance conventions - ed.) is consistent and practically unanimous. Courts of different jurisdictions - independently of each other - come to the same conclusion.

She specifically cites examples of decisions in India and Australia, where courts and tax authorities unequivocally proceed from the fact that aircraft leasing is not a royalty.

In particular, the Delhi High Court in 2024 ruled that payments for helicopter leasing cannot be taxed as royalties if an international agreement explicitly excludes such operations from the relevant definition. And the Mumbai Tribunal in 2025 confirmed that the mere presence of an aircraft in the country does not create a permanent establishment for the lessor and does not give the state the right to taxation.

Why this story goes far beyond aviation

According to Kuznechikova, the problem of aviation leasing is just one symptom of a deeper illness: the lack of consistent practice in applying international tax treaties in Ukraine.

The problem is that Ukraine does not have a formed judicial culture of applying international tax treaties. There is no translated and accessible version of the OECD Commentaries in Ukrainian. There are no specialized chambers or judges for international tax law. There are no mandatory methodological clarifications from the Ministry of Finance regarding the qualification of typical types of income under DTA. All this creates conditions under which each case turns into terra incognita - and the tax service has a significant advantage simply due to the "authoritarian orientation" of resolving cases involving the budget and the procedural exhaustion of the taxpayer.

The reputational problem, in her opinion, is broader.

If Ukraine signs an international treaty and then finds a way to interpret it in a manner that contradicts the obvious will of the parties and international standards, this sends a strong negative signal to foreign investors in general. Legal predictability is one of the key factors in investment decisions. Today - aviation leasing, tomorrow - any other sphere.

She is convinced that it is now about whether Ukraine will become a country that can be trusted to fulfill its international obligations.

For a country striving for Euro-Atlantic integration, attracting foreign investment, and restoring the aviation industry after the war, this trust is literally a strategic resource.

It should be noted that in a situation where the Bureau of Economic Security effectively interprets international tax agreements in its own way and opens criminal cases against representatives of the aviation business, the issue of aviation leasing taxation has long gone beyond a purely fiscal dispute. It is now about the stability of the rules of the game for business, the ability of Ukrainian airlines to operate in international markets and thus survive in conditions of closed skies over Ukraine, preserving jobs, the aircraft fleet, and professional personnel, as well as trust in Ukraine as a state that fulfills its international obligations.

That is why the state must promptly provide clear methodological explanations and establish a unified law enforcement practice regarding the application of international conventions on the avoidance of double taxation. Otherwise, the risks to the existence of the civil aviation industry, the investment climate, and Ukraine's international reputation will only increase.