Aviation under pressure: how reclassifying aircraft lease payments as royalties threatens Ukraine
Kyiv • UNN
The ESBU interprets aircraft leasing as royalties, creating risks for five airlines. Experts claim violations of international law and agreements.
Key Ukrainian airlines have come under pressure due to attempts by the Bureau of Economic Security to interpret the leasing of vehicles abroad as royalties. Such actions by the law enforcement agency, as explained in a comment to UNN by Svyatoslav Bolinskyi, CEO of the law firm "Bolinskyi and Team," could result in complicating access for Ukrainian airlines to the international leasing market, as they run counter to the norms of international law and increase risks for foreign counterparties.
For international business, compliance with current legislation and ratified international conventions is critical. According to a study by the Union of Ukrainian Entrepreneurs involving international investors, constant changes in legislation and regulatory acts, as well as the ignoring and incorrect interpretation of legal provisions and judicial practice by law enforcement agencies, significantly worsen the investment climate in Ukraine. This increases risks for foreign counterparties and may complicate access for Ukrainian airlines to the international leasing market,
Context
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 have paid 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 BES pressure: UIA, "Constanta Airline", "Urga", "H3OPERATIONS", and "Skyline". Furthermore, court materials indicate similar approaches in other industries; they are attempting to impose an additional levy on leased railway transport and even agricultural machinery.
Svyatoslav Bolinskyi emphasizes that royalties and leasing are different categories that differ, in particular, in their taxation regime.
Aircraft leasing cannot be compared to royalties. Royalties are remuneration for the use of intellectual property as such, while leasing is the use of property. This principle is enshrined in Art. 806 of the Civil Code of Ukraine and in the provisions of the Law of Ukraine "On Financial Leasing,"
In the case of leasing, an aircraft is a tangible asset, not an object of copyright or patent law. Aircraft leasing is not related to the transfer of intellectual property rights and, accordingly, is not a royalty. According to Bolinskyi, Ukrainian courts have repeatedly emphasized this in their decisions.
Usually, international conventions distinguish between the taxation regimes of different payments: debt obligations, royalties, dividends, net profit, etc. The same approach is applied in the OECD Model Tax Convention on Income and on Capital and its commentaries, where payments for the use of vehicles are not considered royalties. The 2001 Convention on International Interests in Mobile Equipment (Cape Town Convention) also treats aviation leasing specifically as a property structure rather than a licensing one,
Conventions on the avoidance of double taxation concluded by Ukraine based on the OECD Model Convention do not provide for the classification of aircraft leasing payments as royalties. Such payments, Bolinskyi emphasizes, are considered in international practice specifically as payment for the use of property or business profit, and in no case as payment for the use of intellectual property objects.
According to Bolinskyi, in practice, there is an overly broad interpretation of the term "royalties," which must be clearly distinguished from the term "leasing" — this will allow for avoiding a distorted interpretation of norms, even if the company uses mixed contracts.
In each case, there may be different situations. For example, a situation may occur where a company uses mixed contracts. In any case, it is necessary to distinguish between royalties and leasing and resolve the dispute taking into account the materials of the case. In practice, one can see attempts at an overly broad interpretation of the concept of "royalties," even contrary to the provisions of civil, tax, and international law. Ignoring the established legal positions of the Supreme Court and international approaches creates a state of legal uncertainty for the aviation business and calls into question standard mechanisms for international financing of the aviation industry,