Ukraine without its own aviation? The threat posed by the ESBU's prosecution of airlines over leasing
Kyiv • UNN
The Economic Security Bureau of Ukraine (ESBU) is prosecuting airlines over a requirement to pay royalties for aircraft leasing. This new interpretation of tax legislation threatens to destroy the domestic aviation industry.
The approaches of Ukrainian tax authorities toward the interpretation of taxation for aircraft leasing abroad by Ukrainian airlines, which changed in 2024, have created a new zone of legal uncertainty for the aviation business. This concerns the risk of reclassifying lease payments as royalties, which could lead to an additional fiscal burden in the form of double taxation and creates grounds for prosecution by the Bureau of Economic Security, UNN reports.
Persecution of civil air carriers
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—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 Double Taxation Conventions 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 levy on leased railway transport and even agricultural machinery.
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. Therefore, 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. In doing so, the fiscal authorities are juggling articles of international double taxation conventions, claiming that for aircraft rentals, airlines must pay fees as if for the use of intellectual property.
It is telling that even international legal advisors who consult lessors admit that such an interpretation of legislation and norms of international law carries a number of risks. In particular, it is noted that after the change in the Tax Service's approach in 2024, lease payments may in certain cases be reclassified depending on the application of specific double taxation treaties.
At the same time, Anna Tsirat, a lawyer specializing in international aviation law, leasing, and aircraft financing, writes in one of her articles that historically, the rental (leasing) of aircraft was considered part of international transport and fell under Article 8 of international double taxation conventions, which provides for the payment of taxes exclusively in the country of the lessor's residence.
Historically, payments made by Ukrainian airlines to non-resident lessors were usually considered part of the operation of aircraft in international traffic and, therefore, were exempt from withholding tax in accordance with Article 8 of the DTA. This approach generally corresponds to international practice and the structure of the global aviation leasing market
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.
But after the change in the approach to interpreting the law, 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 the fact that they are Ukrainian.
Accordingly, this (the change in the interpretation of the law – ed.) creates a situation where a Ukrainian airline becomes less attractive a priori. 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
New practice without changes in the law
As already mentioned, the key problem is that the change in approach occurred without any innovations in the legislation. It concerns a new interpretation by tax officials and, consequently, by Bureau of Economic Security investigators of the norms—specifically, an attempt to apply Article 12 of the Double Taxation Conventions (royalties) to leasing operations that clearly fall under Article 8 (international transport).
Such an interpretation is based on the fact that in certain international treaties, the definition of royalties includes payments for the use of equipment. This explains the emergence of the risk of reclassification.
However, as lawyers note, even in such cases, the issue is not clear-cut, as the concept of "equipment" in the context of international conventions is traditionally applied to technological or specialized assets, rather than to classic commercial aircraft leasing.
In practice, this has already led to a number of disputes involving Ukrainian airlines, mainly regarding the classification of lease payments and the availability of treaty protection
Judicial practice is not on the side of the tax authorities
Judicial practice in these disputes is precisely an additional argument in favor of business. Ukrainian courts have repeatedly sided with the airlines.
In particular, in a case involving Windrose Airlines, the Supreme Court concluded that tax authorities cannot automatically apply the concept of beneficial owner to leasing operations.
The court ruled that the concept of beneficial ownership should not automatically extend beyond dividends, interest, and royalties, and that the tax authority must prove that the non-resident lessor acted only as an agent or nominal lessor. If the lessor receives lease payments to its account under the contract and it does not follow from the lease agreement that it is merely an intermediary, Article 8 of the DTA should apply
A similar approach was applied in disputes involving UIA, where courts also rejected attempts by tax authorities to arbitrarily change the qualification of payments.
Despite this, the Bureau of Economic Security ignores court decisions and continues to persecute the aviation business.
Lawyers point out that the risk of reclassification depends on the structure of the deal, the jurisdiction of the lessor, and the specific double taxation treaty. However, in practice, the context is much broader.
If the same operation can be interpreted differently depending on the approach of the tax or law enforcement agency, it creates systemic legal uncertainty. Business is forced not only to structure deals taking into account potential risks but also to prepare for possible disputes that are already taking place in courts.
Risks for the industry and the economy
Despite the fact that formally these are supposedly "individual cases" of reclassification, the consequences could be much broader.
The aviation industry is traditionally considered strategic for the economy because it has a powerful multiplier effect: it generates foreign exchange earnings, creates jobs in related sectors—from technical maintenance to logistics—and ensures the country's integration into global markets. In conditions of closed skies, Ukrainian airlines have not ceased operations but have effectively relocated their operational model abroad, continuing to perform commercial flights and ensuring the inflow of foreign currency to Ukraine.
Moreover, certain air carriers are involved in performing United Nations humanitarian missions, where they compete with Russian companies, among others. This not only supports Ukraine's international image as a reliable partner but also confirms the competitiveness of Ukrainian aviation on the global market. In such a situation, any additional fiscal pressure looks not only economically unjustified but also strategically harmful to the state.
Ukraine's aviation industry depends almost entirely on leasing aircraft from non-residents. Any additional tax burden automatically increases the operating costs of companies, reduces their competitiveness, and creates risks of winding down cooperation with international lessors.
Ultimately, this could affect both the availability of air travel and foreign exchange inflows to Ukraine. A decrease in the competitiveness of domestic air carriers will mean the gradual replacement of Ukrainian airlines by foreign ones. In the end, this could lead to the collapse of an entire industry and the loss of professional personnel. Restoring this sector in the post-war period would take decades.
Ukraine risks finding itself in a situation where airports open, but there will be no one to fly except foreign carriers.