Established practice is forming in Ukraine: courts refuse to recognize vehicle leasing as royalties
Kyiv • UNN
Courts have prohibited the State Tax Service from interpreting vehicle leasing as royalties and assessing taxes. This applies to the leasing of railcars, aircraft, and agricultural machinery.
In Ukraine, a consistent judicial practice is gradually forming regarding one of the most problematic tax issues of recent years for transport companies. Courts are refusing to side with tax authorities and recognize the leasing of vehicles from non-resident companies of Ukraine as royalties, noting that this is not the rental of intellectual property. Relevant court rulings are posted in the Unified Register of Court Decisions, UNN reports.
Ukrainian legislation regarding the taxation of transport leasing by Ukrainian companies abroad has remained unchanged for decades. Despite this, in May 2024, the former team of the State Tax Service under the leadership of Tetiana Kiriienko published a clarification on the official STS website, stating that such payments should be taxed at a 15% rate as royalties.
This approach provoked a series of legal disputes between tax authorities and transport companies and even led to the opening of criminal proceedings against five airlines. At least 5 airlines have already suffered from the pressure of the Bureau of Economic Security: UIA, "Constanta Airline", "Urga", "H3OPERATIONS", and "Skyline". Furthermore, court materials indicate similar approaches in other industries; attempts are being made to impose an additional levy on leased railway transport and even agricultural machinery.
Railcars under lease. Court decision of 2022
Particularly indicative in the attempts to tax vehicle leasing as royalties were the decisions in the cases of LLC "Rail Logistics" and LLC "LEMTRANS", where tax authorities tried to interpret the rental of railway rolling stock as the use of intellectual property objects or "industrial, commercial, or scientific equipment" with corresponding tax consequences. However, the judges, relying on international law and Ukrainian legislation, did not support such an approach.
For example, in the case of LLC "Rail Logistics", the Sixth Administrative Court of Appeal back in 2022 canceled a tax notification-decision of the STS regarding the additional assessment of over 2 million UAH in taxes and penalties. Even then, the tax office insisted that the Ukrainian company should have withheld tax on payments to non-residents from Estonia under railcar lease agreements, as such payments were allegedly royalties. This concerned agreements with the companies MaxiRail OU, AS Kunda Trans, and LOGISTOR AS for the lease of railway rolling stock.
The court reached a fundamental conclusion that railway rolling stock is a vehicle, not an object of intellectual or industrial property. Therefore, payments for its use cannot be recognized as royalties.
The railway rolling stock (railcars) that are the subject of lease agreements concluded by the plaintiff with "MaxiRail OU" (Estonia), "Kunda Trans AS" (Estonia), and "LOGISTOR AS" (Estonia) is not innovative equipment, is not protected by copyright, and is not covered by the concept of industrial, commercial, or scientific equipment within the meaning of the Convention. The railway rolling stock lease agreements examined by the court do not contain any essential terms of license agreements and do not belong to agreements in the field of intellectual property on the basis of which royalties can be calculated and paid
The panel of judges noted that the leasing of railway cars cannot be interpreted as royalties. The court pointed out that the concept of "royalties" involves payments for the use or the right to use patents, trademarks, inventions, industrial designs, know-how, and other objects of intellectual property. In contrast, railcars, locomotives, or other transport are not such objects. They are not protected by copyright and are not transferred under license agreements.
Railway leasing 2025
The existence of a previous court decision from 2022 did not stop tax authorities in their attempts to further tax the leasing of railway transport as royalties.
The STS tried to assess LLC "LEMTRANS" with over 15.4 million UAH in tax liabilities and over 1.8 million UAH in penalties due to operations involving the lease of railcars and locomotives from the Estonian companies AS Operail and AS Operail Leasing. The tax office, according to the court ruling, claimed that payments for the use of rolling stock should be qualified as royalties in accordance with the aforementioned Convention between Ukraine and Estonia for the avoidance of double taxation.
However, in October 2025, the Sixth Administrative Court of Appeal supported the business's position and canceled the tax notification-decision.
The court drew attention to several fundamental points.
Firstly, the Convention for the Avoidance of Double Taxation, which belongs to international law, takes precedence over the internal legislation of Ukraine. If a non-resident is a tax resident of a state with which Ukraine has concluded an international treaty, the rules of the international agreement apply to them.
Secondly, vehicles in Ukrainian legislation are clearly separated from machinery and equipment. The Law "On Railway Transport" explicitly defines railcars and locomotives as vehicles. A similar approach is contained in accounting legislation, which separates the categories of "machinery and equipment" and "vehicles."
Thirdly, the court specifically emphasized that royalties are remuneration for the use of intellectual property rights, not tangible property.
The term royalties as used in this article (Art. 12 of the Convention – ed.) means payments of any kind received as consideration for the use of, or the right to use, any copyright in literary, artistic, or scientific works (including cinematographic films, any films or tapes for radio or television broadcasting), any patents, trademarks, designs or models, plans, secret formulas or processes, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience (know-how). Thus, royalty means a payment for the use or granting the right to use any right, and not the industrial, commercial, or scientific equipment itself
The judges noted that in the context of the norms of the Tax Code of Ukraine and international treaties, this refers to the use of exclusively innovative equipment related to copyright, rather than the use of any equipment.
The case materials contain no evidence to confirm that the fitting platforms (railcars) leased by the plaintiff belong to the category of industrial, commercial, or scientific equipment within the meaning of Article 12 of the Convention, are protected by copyright or patent law, or contain features of intellectual or industrial property objects. Therefore, there are no grounds to qualify the fee for the use of such objects as royalties
Thus, Ukrainian courts have already formed a consistent approach in disputes regarding the taxation of leasing. They indicate that the use of transport (aircraft, railcars, locomotives, agricultural machinery) cannot be automatically equated to the use of intellectual property. And therefore, it cannot be taxed as royalties.
And although the tax service has tried to promote the opposite approach for years, the Bureau of Economic Security has now followed a similar path. The essence of their claims against airlines remains the same. Investigators are trying to interpret standard international leasing operations as a mechanism for paying royalties to non-residents and are questioning the application of international conventions for the avoidance of double taxation.
Against the backdrop of a unified judicial approach to resolving disputes, the issue is gradually moving beyond individual tax disputes and gaining significance for the entire economy. After all, Ukraine's investment attractiveness, the stability of the transport sector, and the ability of Ukrainian business to integrate into global markets directly depend on the state's approach to compliance with international law.