Leasing under fire: how Ukraine is trying to tax operations abroad and apply double taxation

Ukrainian companies operating in international markets and using leasing are increasingly facing attempts to accrue additional taxes in Ukraine, despite the fact that their activities actually take place abroad. Despite the existence of international agreements and conventions on the avoidance of double taxation, Ukrainian tax authorities are trying to apply tax rules to such operations, which creates a risk of double taxation and unjustified pressure for companies, UNN writes.

Double taxation of leasing

Recently, there have been active attempts in Ukraine to tax the activities of domestic enterprises abroad. This refers, for example, to situations where Ukrainian companies lease property from non-residents and make lease payments to foreign counterparties. At the same time, such assets are not used on the territory of Ukraine, and income from their operation is generated exclusively abroad. 

Despite the fact that conventions on the avoidance of double taxation are in force with many foreign countries, the State Tax Service considers these payments to be taxable in Ukraine, effectively ignoring the international nature of the operations.

As Dmytro Mykhailenko, president of the Association of Tax Consultants, explained, similar situations have arisen before, and Ukrainian businesses have had to defend their position in court. "The payment of lease payments abroad... was the subject of legal disputes... and then, as far as I remember, they fought off taxes," he noted in a comment to UNN.

At the same time, according to him, the problem lies in the conflict between national legislation and international agreements. Mykhailenko explains that ordinary lease payments are taxed according to Ukrainian legislation. However, if it concerns operations abroad, then leasing is exempt from taxation in those countries with which relevant international conventions are in force.

Thus, formally, Ukraine has agreements on the avoidance of double taxation with a number of jurisdictions where Ukrainian businesses actively operate, including Cyprus, the UAE, EU countries, and others. Such agreements provide for either a reduction in the tax rate on non-resident income or a complete exemption from taxation for certain types of income. However, as tax experts explain, in practice, the tax service increasingly questions the possibility of applying these provisions, particularly due to the interpretation of the beneficial owner's status or the nature of the operations themselves.

As a result, Ukrainian companies are forced to actually pay taxes twice: first in the country where they actually operate and generate income, and then again in Ukraine. This contradicts the very logic of international tax agreements, creates an additional financial burden on businesses, and effectively kills the competitiveness of Ukrainian enterprises.

Pressure on business through double taxation

Of particular concern is the fact that tax disputes in such cases often go beyond the usual administrative process and move into the realm of criminal investigations. The Bureau of Economic Security enters the game, opening criminal proceedings, using analytical conclusions of tax officials as a basis without clearly established violations.

As Vyacheslav Cherkashyn, senior tax analyst at the Institute of Socio-Economic Transformation, notes, such practice creates additional pressure on business. 

This story is also related to the fact that our BEB is just beginning to unfold its activities, and these analytical conclusions, which are not based on anything at all, are currently a form of pressure.

He noted that the BEB can open criminal proceedings based on a tax audit report that revealed violations. "And there is an even worse format when the tax office has even conducted a comprehensive audit, and the BEB, with an analytical note, based on these conclusions, initiates a criminal case. That is, it is very difficult for businesses to defend themselves in this last case," Cherkashyn explained.

According to him, the problem is complicated by the fact that such conclusions are practically impossible to appeal at the initial stage, and companies are forced to defend themselves already within the framework of criminal proceedings. This means risks of searches, arrests, and blocking of activities even in cases where it is only about different interpretations of international taxation norms.

At the same time, experts emphasize that leasing is one example of a broader trend. Other cross-border operations are also subject to similar pressure. "Any dividend flows are challenged, not just lease payments," said Vyacheslav Cherkashyn.

Against this background, Ukrainian businesses are forced to adapt their business models and increasingly create operational companies abroad to minimize risks associated with currency regulation and tax pressure. In turn, such a position of the controlling bodies can ultimately obviously lead to losses at the state level - from a decrease in foreign exchange earnings to a complete relocation of businesses abroad.

Thus, attempts to tax leasing operations abroad indicate the formation of a dangerous practice when international tax rules are actually revised at the level of national administration. If it continues to spread, Ukrainian businesses risk losing competitiveness in global markets, and the state will lose its status as a predictable jurisdiction for international activities.