Taxing vehicle leasing as royalties is legally groundless – lawyer
Kyiv • UNN
The lawyer explained that vehicle leasing constitutes the use of property rather than intellectual property. The ESBU is investigating cases against five leading airlines.
Payments for the leasing of transport, including aviation, cannot be considered royalties, as they concern the use of property rather than intellectual property. Even high-tech transport remains a material object, and therefore its leasing does not create grounds for the corresponding tax treatment without proving the fact of intellectual property use. This opinion was expressed in an exclusive comment to UNN by attorney Dmytro Kasianenko.
Context
The Bureau of Economic Security (BES) 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 pay 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, as is the fact that 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 fee on leased railway transport and even agricultural machinery.
"Leasing of transport is not a royalty. It is the ordinary use of property. If a company leases an airplane, helicopter, car, wagon, or other equipment, it pays not for 'intellectual property,' but for the opportunity to use a specific vehicle. That is, the company does not buy the right to a patent, trademark, secret technology, drawing, program code, or know-how. It simply receives the transport for use for a certain period and pays lease payments for it,"
According to him, that is precisely why such payments cannot automatically be called royalties.
"Royalties arise when payment is made for the right to use an object of intellectual property: for example, a trademark, patent, program, technology, copyrighted work, or know-how. If the subject of the contract is an airplane or a car, rather than the right to a technology or brand, then it is property leasing, not an intellectual property license,"
Dmytro Kasianenko points out that even if the equipment is complex and high-tech, this does not change its legal nature. "An airplane may be a very complex technical object, but legally it remains a vehicle. Similarly, a car, a wagon, or agricultural machinery does not become intellectual property just because it has a complex design. Therefore, the attempt to tax transport leasing as royalties looks legally groundless," the lawyer explained.
He added that the tax or law enforcement agency must prove that the payment was made specifically for the right to use intellectual property, and not just for the use of transport. If there is no such proof, it is not a royalty, but an ordinary lease payment.
Addendum
It is important to note that for over 30 years, the legislation regarding the taxation of leasing in Ukraine has not changed, and previously it did not raise questions or remarks from either tax or law enforcement authorities. Thus, there are clearly no justified grounds for the Bureau of Economic Security investigators to change the interpretation of the law, and the situation looks exclusively like pressure on business that harms the state.
The situation changed after the State Tax Service of Ukraine, under the leadership of the old team of Tetiana Kiriyenko—known for repeated attempts to persecute entrepreneurs—published an article on May 24, 2024, with clarifications regarding the taxation of leasing operations by airlines. In these "reflections on the topic," tax officials indicate that the leasing of aircraft from non-resident companies must be taxed as royalties. At the same time, the fiscal authorities juggle articles of international conventions on the avoidance of double taxation, claiming that for aircraft rentals, airlines must pay fees as if for the use of intellectual property.
It is worth noting that Ukrainian airlines are not the only ones who lease planes and helicopters. Almost all global air carriers operate under the same approach, as it allows for faster and cheaper operations. And it is precisely this approach to taxation—paying fees in the country of the lessor's residence—that corresponds to the global practice of the aviation market.
However, after the change in the interpretation of the legislation, according to Mykola Shcherbyna, an expert in transport and mechanical engineering and executive director of the Public Union "Ukrainian Air Transport Association," Ukrainian airlines are forced to effectively pay a "flag markup," meaning they pay for being Ukrainian.
"Accordingly, this (the change in the interpretation of the law – ed.) creates a situation where a Ukrainian airline becomes inherently less attractive. And this is not a question of management efficiency; it is a question of the rules of the game, which in this case are dictated by the state itself in the person of tax and regulatory authorities. I would say that our airlines are effectively forced to pay a markup for operating under the flag of Ukraine,"