BEB case against former UIA officials regarding lease taxation is based on a flawed interpretation of international law - lawyer

Instead of state support, Ukrainian airlines, which due to the war were forced to reorient completely to work abroad, face legal and fiscal pressure in Ukraine. One striking example is the case against the former management of PJSC "Ukraine International Airlines" regarding alleged non-payment of taxes for aircraft leasing. Oleg Ishchenko, lawyer for former UIA president Yevhen Dykhne, in an exclusive comment to UNN, said that the criminal proceedings, which are being investigated by the Bureau of Economic Security, are based on a legally untenable construction, and the accusations themselves contradict international law and the Tax Code of Ukraine.

Case against former UIA president

As UNN previously reported, BES investigators notified former UIA director Yevhen Dykhne and the former accountant of the carrier of suspicions. According to the investigation, lease agreements for Boeing 737 and Embraer aircraft were concluded between a Cypriot company (the owner of the aircraft) and the Ukrainian airline.

In fulfillment of these agreements, in 2017–2022, UIA paid the Cypriot company income in the form of lease payments for the use of aircraft totaling over UAH 3.4 billion.

Using the Convention between the Government of Ukraine and the Government of the Republic of Cyprus on the elimination of double taxation, which has been in force since 2013, the former management of the Ukrainian company applied a preferential rate of 0% repatriation tax for payment in Ukraine when making payments.

The BES is convinced that the application of the preferential rate by the former management of the Ukrainian airline did not comply with the terms of the concluded agreements and the actual needs of aircraft operation. Investigators believe that the airline should have paid a 10% tax rate to the budget, despite the fact that the company had already paid these taxes in Cyprus.

It should be noted that at the start of the investigation, the investigation stated that 7 Boeing 737 and Embraer E 190 aircraft were subject to leasing. Why only two remained in the case is not yet known for certain.

A case that should not exist

According to lawyer Oleg Ishchenko, the very attempt to bring former UIA president Yevhen Dykhne to criminal responsibility looks at least strange at the initial stage. The lawyer is convinced that even if one abstracts from all other legal nuances, Dykhne, as the head of the company, should not bear personal responsibility for the tax block, since in the corporate model of UIA, powers between the director and the financial director were clearly delineated.

"I'm not even talking about any intent. The head of the company, in this case I am defending Dykhne, he should not bear any responsibility for paying these taxes, even if they existed," said Oleg Ishchenko. He added that the UIA charter explicitly stated that the financial director was responsible for the company's financial policy, including taxes.

In fact, according to the defense, the BES is trying to bring to criminal responsibility a person who was not even formally the proper subject of the imputed actions. But this is only one of many arguments that destroy the logic of the criminal proceedings.

The key problem is the substitution of the very essence of leasing

The main legal conflict on which the position of the Bureau of Economic Security is based is that the investigation, according to Oleg Ishchenko, is actually trying to call ordinary operational leasing of aircraft "intellectual property" in order to bring such payments under a different tax regime.

It is on this, according to the defense, that the entire structure of the suspicion rests.

The desire to bring UIA and, in this case, Dykhne to criminal responsibility is based on an incorrect interpretation of the Convention on the Elimination of Double Taxation and the Tax Code of Ukraine

He explained that international conventions on the avoidance of double taxation clearly distinguish between different types of income. And if it is about the operation of air transport in international transportation, then such income is not subject to taxation in Ukraine according to the logic that the BES is now trying to apply.

By the way, the court has already put an end to a similar case. At that time, it was about the leasing of aircraft that UIA leased from a British company. The judges explained that such operations are not subject to taxation, because international law applies to them. In addition, in the case materials, the court explained that in matters of avoiding double taxation, conventions always have priority.

In particular, Article 103 of the Tax Code of Ukraine provides for a reservation regarding the consideration of the norms of international treaties that have entered into force on the avoidance of double taxation when residents or permanent establishments of non-residents pay income with a source of origin from Ukraine to a non-resident, since such norms have priority over the norms of domestic tax legislation. Paragraph 103.1 of Article 103 of the Tax Code of Ukraine states that the application of the rules of an international treaty of Ukraine is carried out by exempting from taxation income with a source of origin from Ukraine, reducing the tax rate, or by returning the difference between the paid amount of tax and the amount that a non-resident must pay in accordance with an international treaty of Ukraine.

However, according to the lawyer of the former UIA president, the investigation is artificially trying to substitute the very nature of lease payments.

What does the BES do? The BES takes and interprets these aircraft as intellectual property. That is, not as a vehicle, but as intellectual property

Aircraft for passenger transportation VS intellectual property

The lawyer specifically emphasizes that even those international approaches referred to by the investigation are interpreted selectively in this case and are taken out of context.

According to him, in certain cases, an aircraft can indeed be considered specialized equipment. But this is only possible when it is not used for its direct purpose, but, for example, as a laboratory or a technical platform for testing. In the case of civil aviation, the situation is fundamentally different.

When an aircraft begins to be used for its consumer purpose, that is, it carries passengers, it immediately transitions from intellectual property to ordinary transport

That is why, according to him, the attempt to equate a passenger aircraft used for passenger transportation with an object of intellectual property does not stand up to any legal criticism.

Oleg Ishchenko reminded that Ukrainian courts have repeatedly taken the same position.

This has already been said by a hundred courts in Ukraine. I don't know how many court decisions there are on this matter. I don't know how else to explain things that are obvious to any sane person

The tax office previously confirmed that it is transport, not royalties

A separate and very important argument of the defense is the existence of official tax consultation conclusions for UIA, in which, according to the lawyer, the tax service previously directly recognized that such leasing operations are not subject to taxation in the manner that the Bureau of Economic Security is now trying to impose.

UIA has a so-called tax consultation. In this tax consultation, the tax office itself wrote that it is a vehicle and that these operations (leasing - ed.) are not taxed

Therefore, such an explanation is of fundamental importance not only for assessing the tax nature of lease payments themselves, but also for the issue of any liability of airline officials. After all, according to the lawyer, the Tax Code directly provides that if a taxpayer acts on the basis of an official tax consultation, he cannot be held liable for actions that comply with such a consultation.

In other words, even under the harshest interpretation for the company, criminal prosecution in such a situation should not have arisen at all.

Tax agent, not taxpayer

Another important legal nuance that the defense of the former UIA president draws attention to is that the airline, in legal relations with the lessor, was not the direct taxpayer for itself. The company acted as a tax agent when paying income to a non-resident. That is, in essence, it only withheld or did not withhold tax from the other party.

UIA acted not as a taxpayer, but as a tax agent. What does this mean? This means that it does not pay taxes for itself, but it collects tax from the Cypriot company (the lessor - ed.)

And then, according to him, another direct mechanism provided by the Tax Code of Ukraine itself comes into play. If the recipient company is a resident of a state with which Ukraine has a valid Convention on the Avoidance of Double Taxation, then the Ukrainian tax agent has the right not to withhold tax or to apply a preferential rate, depending on what is provided for by the international document.

Oleg Ishchenko noted that UIA provided relevant certificates on the operation of the Convention to the controlling bodies annually. That is, the airline acted not arbitrarily, but precisely within the framework of those mechanisms that are directly provided for by law and international agreements.

Without an agreed tax liability, there can be no crime

Another block of arguments concerns not the essence of the tax dispute, but the basic procedural grounds for criminal prosecution.

The lawyer draws attention to the fact that in Ukraine, the taxpayer's obligation to pay the additionally assessed tax liability arises only when it becomes agreed. That is, either when the taxpayer has not appealed the relevant tax notification-decision, or when the dispute has finally ended not in his favor.

If the tax notification-decision is appealed in court, it means that it is not agreed, and therefore the obligation to pay the accrued amount has not yet arisen.

Currently, according to Oleg Ishchenko, the court is considering a dispute with the tax office regarding the assessment of tax for the leasing of aircraft from a Cypriot company, and a final decision in this case has not yet been made. That is, there is no tax liability for UIA yet.

This, in essence, calls into question the very logic of criminal prosecution for "evasion" of something that has not yet even become a finally established legal obligation.

BES investigators have questionable sources

The defense of the former UIA president indicates that BES investigators, within the framework of the investigation, refer to international documents with which they try to strengthen their positions. However, according to Oleg Ishchenko, the BES uses in its argumentation not a valid international Convention ratified by Ukraine, but a framework document that was not properly implemented into Ukrainian legislation and was not even officially published.

They found it somewhere... they take a screenshot from the screen... I ask, are you in kindergarten?

Ultimately, such an approach to the investigation of criminal proceedings can introduce a dangerous practice when criminal prosecution of business is built on the basis of dubious, unofficial, or invalid sources for direct application.

Threat to the aviation market

The story with UIA goes far beyond one criminal proceeding or one airline. In fact, such an approach by the BES already has a negative impact on the entire Ukrainian aviation market, because, according to Mykola Shcherbyna, director of the Public Union "Ukrainian Air Transport Association", similar accusations are being made against other carriers.

He said that the essence of the problem is that the entire global aviation market operates through leasing. Airlines around the world do not buy planes, but lease them, because it is cheaper. For Ukraine, where civil aviation is already in an extremely vulnerable state due to the war and closed skies, the attempt to criminalize or fiscally complicate this model means a de facto blow to the viability of the entire industry.

Moreover, such tax pressure destroys the competitiveness of Ukrainian carriers in the international market.

If the BES continues such a practice of persecuting airlines and moves towards calling standard leasing operations, common throughout the world, "intellectual property" or looking for criminal intent where there is a tax dispute, this will obviously create a regime of constant uncertainty and risk for all Ukrainian carriers.