The legal nature of leasing: lawyer explains why transport payments cannot be royalties
Kyiv • UNN
Transport leasing does not involve the transfer of intellectual property rights, therefore it cannot be taxed as royalties. Attempts by the ESBU (Bureau of Economic Security of Ukraine) to change this threaten the operation of the civil aviation industry and economic stability.
Leasing of vehicles, from aircraft to railway rolling stock or agricultural machinery, cannot be taxed as royalties, as the transaction itself does not involve the transfer of intellectual property rights. This opinion was voiced in an exclusive comment to UNN by Alina Parkhuta, an intellectual property lawyer at the LOGIC law firm.
Persecution for leasing
The Bureau of Economic Security (BES) and tax authorities are attempting to establish a practice of taxing vehicle leasing transactions between Ukrainian companies and non-resident lessors. This involves attempts to impose what are effectively additional fees on leased agricultural machinery, railway transport, and aircraft. In the latter case, despite the existence of international conventions providing for the avoidance of double taxation, including for leasing operations, the BES has opened a series of criminal cases against at least 5 airlines. As reported by UNN, the airlines UIA, "Constanta Airline", "Urga", "H3OPERATIONS", and "Skyline" have already suffered. In other words, the situation has already moved beyond a conditional "tax misunderstanding" and threatens the functioning and existence of the entire civil aviation industry.
Analysis of court materials contained in the Unified Register of Court Decisions demonstrates that the BES approach not only contradicts the law but also creates risks of illegal double taxation for airlines.
The key conclusion that runs like a red thread through judicial practice is that royalties can only arise in cases involving the use of intellectual or industrial property objects. This refers to cases where an aircraft is used as equipment, for example, a sort of scientific laboratory with wings. However, this concept in no way applies to civil air transport, whether passenger or cargo.
What is intellectual property
Lawyers point out that the key problem with this approach by the BES and tax authorities lies in mixing two different legal regimes: tangible objects and the results of intellectual activity. As explained by Alina Parkhuta, an intellectual property lawyer at the LOGIC law firm, intellectual property refers to rights to intangible results of creative or scientific-technical activity, rather than the things themselves as physical objects.
Intellectual property includes rights to the results of human mental activity, including in the industrial sphere, which can include transport as a material result of such activity. However, this does not mean that any transport automatically becomes an object of intellectual property rights
According to her, in the transport sector, only individual elements can be objects of intellectual property—for example, innovative engines, safety systems, software solutions, industrial designs, or trademarks. That is, it is not about the vehicle as such, but about specific protected technical or design solutions.
In other words, to be recognized as intellectual property, a specific object must contain a new technical solution or another innovation that is appropriately protected in the form provided by law; as a general rule, transport, especially mass-produced transport, is not and cannot be recognized as such an object
This is of fundamental importance for the tax qualification of payments. Royalties, according to legislation and international practice, are payments specifically for the use of intellectual property objects or for granting rights for such use. This refers to patents, copyrights, know-how, trademarks, etc. That is, royalties are charged for the use of intellectual property.
Why not royalties?
At the same time, leasing is a form of property use that does not involve the transfer of any intellectual property rights unless otherwise expressly provided for in the agreement for this transaction.
Royalties mean a payment for the use or granting of the right to such use, and in the context of current legislation, this implies the use of a specific object, not just any object. Thus, the mere fact of use on a contractual basis, including under a vehicle lease agreement, is in no way a ground for recognizing such payments as royalties, especially if such a vehicle does not have the characteristics of an intellectual property object, and the relevant agreement does not link the right of use with the transfer of rights to such an object
It is important to understand that the key criterion is not the form of the contract, but the subject of the rights being transferred. If it concerns the use of a physical object, such as an airplane, locomotive, or agricultural machinery, without the transfer of rights to patents, software, or other intellectual property objects, there are no grounds for qualifying the payments as royalties.
This is particularly evident in cases where the vehicle does not have the characteristics of an intellectual property object, is not a unique laboratory or some innovation, and the relevant leasing agreement does not link the right of use with the transfer of rights to such an object.
Thus, attempts to treat lease payments as royalties effectively ignore the basic provisions of intellectual property law and tax legislation. Such an approach creates risks of distorting the tax base and can lead to unlawful additional tax assessments, particularly in cases of international leasing. Furthermore, it is important to consider that for over 30 years, the legislation providing for the taxation of leasing operations, specifically in the Tax Code of Ukraine, has undergone no changes, and until 2024, the system operated without complaints from tax or law enforcement authorities.
Now, however, law enforcement is going beyond the law and creating systemic risks for business, particularly in strategic sectors such as aviation or transport logistics, which is unacceptable in the conditions of war and further strategic planning for the economic recovery of post-war Ukraine.