Taxation of transport leasing as royalties is legally unjustified - lawyer
Kyiv • UNN
This opinion was expressed in an exclusive commentary to UNN by the founder of the law firm "Kasianenko and Partners" Dmytro Kasianenko
Payments for leasing transport, including aviation, cannot be considered royalties, as it concerns the use of property, not intellectual property. Even high-tech transport remains a tangible object, and therefore its leasing does not create grounds for appropriate tax treatment without proving the use of intellectual property. This opinion was expressed in an exclusive commentary to UNN by lawyer Dmytro Kasianenko.
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 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, and Conventions on the avoidance of double taxation are in effect 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 the pressure of the BES: MAU, "Aviation Company Constanta", "Urga", "N3OPERATIONS" and "Skyline". In addition, court materials indicate similar approaches in other industries, with attempts to impose an additional fee on railway transport under lease, and even agricultural machinery.
Leasing of transport is not royalties. It is 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, drawings, 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 why such payments cannot be automatically called royalties.
Royalties arise when payment is made for the right to use an intellectual property object: for example, a trademark, patent, software, technology, copyrighted work, or know-how. If the subject of the contract is an aircraft or a car, rather than the right to technology or a brand, then it is a lease of property, not a license for intellectual property
Dmytro Kasianenko draws attention to the fact that even if the equipment is complex and high-tech, this does not change its legal nature. "An aircraft may be a very complex technical object, but legally it remains a vehicle. Similarly, a car, railway car, or agricultural machinery does not become intellectual property simply because it has a complex design. Therefore, an attempt to tax transport leasing as royalties appears legally unjustified," the lawyer explained.
He added that the tax or law enforcement authority must prove that the payment was made specifically for the right to use intellectual property, and not just for the use of the vehicle. If there is no such evidence, it is not a royalty, but an ordinary lease payment.
Addendum
It is important to note that for over 30 years, the legislation on leasing taxation in Ukraine has not changed, and previously it did not raise any questions or comments from either tax or law enforcement authorities. Therefore, there are obviously no justified grounds for changing the interpretation of the legislation by the investigators of the Bureau of Economic Security, and the situation appears solely as pressure on business, which harms the state.
The situation changed after the State Tax Service of Ukraine, under the leadership of the old team of Tetiana Kyriienko, known for repeated attempts to persecute entrepreneurs, published an article on May 24, 2024, with clarifications on the taxation of leasing operations by airlines. In these "reflections on the topic," tax officials indicate that leasing 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 leasing, airlines must pay fees as for the use of intellectual property.
It is worth noting that Ukrainian airlines are not the only ones leasing aircraft and helicopters. Almost all global air carriers operate under the same approach, as it allows for faster and cheaper launch of operations. And it is precisely this approach to taxation — paying fees in the country of residence of the lessor — that corresponds to the global practice of the aviation market.
But after the change in the interpretation of legislation, according to an expert in the fields of transport and engineering, Executive Director of the Public Union "Ukrainian Air Transport Association" Mykola Shcherbyna, Ukrainian airlines are forced to effectively pay a "flag markup," i.e., pay for being Ukrainian.
Accordingly, this (the change in the interpretation of legislation — ed.) creates a situation where a Ukrainian airline becomes inherently less attractive. And this is not a matter of management efficiency, but a matter of the rules of the game, which in this case are dictated by the state itself through its tax and regulatory bodies. I would say that our airlines are essentially forced to pay a markup for operating under the flag of Ukraine